Employee diversity and litigation risk: Evidence from the Lilly Ledbetter Fair Pay Act
Erik Devos, William B. Elliott, He Li, Adrian Tippit

We examine the valuation effects of the Lilly Ledbetter Fair Pay Act, which increases potential litigation over discriminatory compensation. Firms with relatively fewer women exhibit significant 3-day abnormal returns of −0.61% around the passage of the Act, whereas firms with more women show no effect. Low-female firms also display larger increases in implied cost of capital and larger decreases in expected cash flow than high-female firms. No significant differences emerge based on racial diversity. Results suggest that investors perceive increased litigation risk and imply that firms in industries with higher gender pay gaps could increase value by reducing the pay gap.
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Consumer stock market expectations and portfolio choice
Yevgeniy Teryoshin

I examine how US households form stock market expectations and how these expectations affect portfolio choice. I find households’ stock market expectations are downward biased and inconsistent with rational expectations. Although expectations exhibit persistence, adaptation to recent outcomes appears only in specifications without controls. Moreover, although statistically significant, the estimate is qualitatively negligible, and the joint parameters when considered alongside the persistence estimate are inconsistent with adaptive learning. Furthermore, in distinguishing between active and indirect investments, I show income and risk aversion matter for active but not indirect investments, whereas stock market expectations play a similar role in both.
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Exploring the multifaceted impacts of convertible bond issuance on stock market quality: Evidence from China
Jianxuan Xin, Qiang Ye, Hao Xia

We investigate how convertible bond issuance impacts stock market quality across four dimensions: liquidity, price efficiency, excess returns, and volatility, using Chinese market data. Findings reveal that convertible bond issuance enhances liquidity and price efficiency but also leads to increased volatility and reduced excess returns. We identify two primary mechanisms: first, the conversion of convertible bonds impacts all four dimensions of market quality; second, high-frequency trading of these bonds reduces stock market volatility, mitigating the overall effect. Heterogeneity analysis indicates that these effects are stronger among firms with smaller market capitalizations, lower-rated convertible bonds, and during negative sentiment periods.
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Does interest rate liberalization affect corporate debt structure?
Obaid Ur Rehman, Linghao Zhang, Kai Wu

This study examines how interest rate deregulation affects debt structure of Chinese listed firms through two quasi-natural experiments: the cap removal (2002–2006) and floor removal (2011–2015). Following deregulation, risky firms increase short-term debt while decreasing long-term and total debt, whereas non-risky firms exhibit opposite patterns. These changes are influenced by collateral requirements, industry cluster proximity, bank relationships, and ownership structure. The divergent outcomes reflect increased borrowing costs for risky firms and reduced costs for non-risky firms due to enhanced banking competition. Post-liberalization, risky firms face reduced risk exposure but increased asset-liability mismatches, while experiencing declining growth prospects. Conversely, non-risky firms demonstrate improved growth prospects and higher profitability with increased long-term debt. These findings illuminate how banking sector liberalization shapes corporate financial strategies.
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The causal effect of local product market shocks on equity holdings: Evidence from the airline industry
Daniel Bradley, Michael Mondello, Forrest Morgeson, Jared Williams

We examine how local product market shocks impact investors’ willingness to own and trade the underlying stock. Using US airlines as our test setting, we exploit plausibly exogenous variation in flight routes. We find that active traders increase their ownership by 10.6% in response to a one standard deviation increase in the airline’s local market share supply. The effects occur within a year of the shock and are positively related to measures of customer satisfaction. The evidence is most consistent with the view that investment decisions are based on both familiarity and investors’ perception of product quality.
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Do temporary changes in earnings caused by mean reversion affect firms’ refinancing decisions?
Elettra Agliardi, Marios Charalambides, Md Shahedur R. Chowdhury, Nicos Koussis

We develop a dynamic two-stage trade-off model with refinancing when earnings are mean reverting. Our model predicts a negative relation between profitability and leverage at refinancing due to conservative debt increases. With multiple rounds of refinancing, the leverage–profitability relation may turn positive when firms have substantial debt tax shields. Our empirical analysis of US firms reveals that firms with moderate incentives to shield tax benefits with debt internalize the temporary increase in earnings caused by mean reversion at refinancing. However, firms with strong incentives to shield tax benefits take on excessive debt despite the temporary increases in profitability.
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Hedge funds and climate news risk: Evidence from stock holdings in fossil fuel firms
Viktoriya Lantushenko, Edward Nelling, Carolin Schellhorn

We examine the role of hedge funds in facilitating the transition to a low-carbon economy. As highly informed and relatively unregulated investors, hedge funds are in a unique position to recognize and address climate change risks. We analyze hedge fund ownership of fossil fuel firms in response to climate news risk and the related lobbying activities of their portfolio firms. With the rise of the divestment movement after 2013, the hedge fund sector reduced its portfolio commitment to risk-exposed lobbyists that are slowing progress towards decarbonization. Our results suggest that hedge funds help facilitate the transition to low-carbon energy sources.
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Are we playing the same “research” game in business?
Joshua C. Fairbanks, Drew B. Winters

This study evaluates the limitations of impact factors in assessing journal quality and explores the competitive dynamics of publishing in top-tier journals across Accounting, Finance, Management, and Marketing. We document notable cross-disciplinary variations that challenge the effectiveness of impact factors. Our findings suggest that expanding journal lists within business disciplines by adding high-impact journals can change the competitiveness of top-tier publications and may lead to imbalances in promotion and tenure (P&T) decisions. This study contributes to the broader discussion on journal quality metrics in business research, advocating for a nuanced approach to achieve fair and accurate assessments across disciplines.
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Local connectedness and corporate social responsibility
Erdem Ucar

I examine the relationship between social connectedness and corporate prosocial behavior, as measured by corporate social responsibility (CSR). Using a novel connectedness measure, I empirically investigate the effect of local connectedness on CSR for a large sample of U.S. firms. I show that firms in areas with stronger connectedness have higher CSR levels. The local connectedness effect on CSR remains robust after addressing endogeneity concerns and robustness checks. My findings suggest that the link between social connectedness and individual prosocial behavior, highlighted in social science literature, exists for corporations, and local connectedness is an important predictor of CSR.
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Firm (re)valuation and payouts
Chintal A. Desai, Anand M. Vijh

We document an inverted-U pattern in the frequency and magnitude of share repurchases across firms arranged into V/P deciles (value to price), and a symmetric opposite pattern in equity issuances. These patterns cannot be explained by the market timing theory, which predicts monotonically increasing share repurchases or decreasing equity issuances across V/P deciles. Instead, these patterns can be explained by Chen and Lambrecht (2021) theory that “cash cow” firms with a target negative net debt ratio decrease payouts to shareholders (or raise equity) after a positive revaluation of their assets captured by high V/P ratios. We demonstrate that the hump-shaped patterns are driven largely by such firms with negative net debt ratio and by “mature” firms with low asset growth consistent with corporate lifecycle theory.
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Economic policy uncertainty and the cost of equity capital
Yizhi Wang, Jingze Zhang, Qiaoqiao Zhu

In this paper, we investigate the role of economic policy uncertainty (EPU) in the cost of equity capital. Our findings suggest that the relationship between EPU and the security market line (SML) varies cross-sectionally. Following periods of high EPU, the SML tends to slope upward, whereas it exhibits a downward slope following periods of low EPU. In the time-series analysis, we observe that EPU significantly and positively affects the beta premium. Further evidence shows that investors may adjust their portfolios, shifting investments from higher-risk assets to lower-risk assets when confronted with high EPU.
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Tournament effects in equity mutual funds: Impact of economic conditions and investment styles
Stéphane Chrétien, Frank Coggins, Catherine Deslauriers

Mutual funds engage in annual competitions to secure top positions in year-end performance rankings. One effect implies that losing funds increase their risk more than winning funds, hoping to improve their rankings. Another effect involves a rational response by winning funds that anticipate the actions of losing funds and take more risk to maintain their position. We propose a novel testing approach that can better capture systematic risk shifting. We find evidence of a rational response when using traditional measures, but models that account for investment-style variations weaken considerably the effects and detect more risk shifting by losing funds.
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