2024 Outstanding Paper Awards
Southern Finance Association, Fall 2024
PGA NATIONAL RESORT – PALM BEACH GARDENS, FL Nov. 20 – 23, 2024
Corporate Finance, sponsored by the Southern Finance Association:
Are Insiders’ Forecasts Reliable to Outsiders? Evidence from Analysts’ Reaction to Merger Synergy Projections
Nabil El Meslmani, Ahmad Ismail, Mohammed Uddin
We examine whether merger-specific information is valuable to sell-side analysts and to stock markets. Analysts revise their earnings forecasts upward for acquirers that disclose larger projected synergies, more specifically, cost savings but not revenue synergies. We show that analysts can see through heterogeneity stemming from CEO personal traits and can process complex information and adjust their forecasts around strategic corporate events. Interestingly, analysts rely more on synergy projections disclosed by non-overconfident CEOs, well governed firms, or when analysts’ forecast quality is not reliable. Analysts’ forecast accuracy improves for firms that disclose larger synergies. Furthermore, investing in a portfolio with High (Low) synergy forecasts and High (Low) analyst forecast revisions generates the highest (lowest) risk adjusted excess returns, suggesting that both management synergy forecasts and analyst forecasts are informative to the stock markets.
Nabil El Meslmani (Saint Mary’s University) accepts the award for Outstanding Empirical Finance Paper from SFA executive director, Ronnie Clayton.
Empirical Finance, sponsored by Wharton Research Data Services (WRDS):
Do Investors Have Data Blind Spots? The Role of Data Vendors in Capital Markets
Sara Easterwood
Financial data vendors collect, aggregate, and process data on clients’ behalf. I show that data vendors’ coverage decisions affect institutional investor demand. I focus on Standard & Poor’s (‘S&P’) Compustat database as an empirical setting. Compustat provides subscribers with decades of 10-K and 10-Q data; however, it does not cover every public firm in every period. I show that institutional investment in firms with no Compustat coverage is over 36% below its unconditional mean, even controlling for other firm characteristics. A novel, quasi-natural experiment establishes a plausibly causal connection: a technology shock at S&P in the 1990s causes a discrete reduction in missing data. This change in data coverage is followed by a significant increase in institutional investment for treated firms relative to control firms. I then show that missing Compustat data is associated with lower informational efficiency of equity prices. I conclude that data vendors’ actions can exert a material influence on capital markets because they affect firms’ access to institutional capital.
Sara Easterwood (Virginia Tech) accepts the award for Outstanding Empirical Finance Paper from SFA executive director, Ronnie Clayton.
Financial Institutions, sponsored by the Southern Finance Association:
What Did Policy Interventions Fix in the Municipal Bond Market – Liquidity or Credit?
Blake Marsh, Huixin Bi
We examine how policy interventions during the COVID pandemic impacted municipal bond market pricing. Focusing on narrow trading windows, we fi nd that announcements of fiscal and direct monetary policy interventions reduced liquidity risk concerns but did not immediately ease credit concerns. Using rolling-window regressions, we find that policy interventions eased credit concerns for short-term bonds over time, while longer-term bond spreads show increased credit risks. The credit risk shift from short- to long-term bonds reflects policy designs that benefitted short-term bonds more, as well as changing investor expectations on state and local government budgets due to the pandemic’s persistence.
Blake Marsh (Federal Reserve Bank of Kansas City) accepts the award for Outstanding Financial Institutions Paper from SFA executive director, Ronnie Clayton.
FinTech, sponsored by the University of South Florida:
AI-Powered Analysts
Michael Kimbrough, Leonard Yang Liu, Musa Subasi
This study explores the impact of brokerage houses’ investments in artificial intelligence (AI) and machine learning (ML) on their analysts’ information production. Understanding the determinants of analysts’ information production is crucial, given its significant influence on stock prices and capital allocation decisions. Utilizing a novel AI-investment measure derived from job posting data, we identify a positive correlation between brokers’ prior AI investments and the enhanced accuracy of their analysts’ EPS forecasts. Consistent with AI’s role in diminishing information integration costs, our findings indicate that increased investments in AI and ML by brokers are associated with a lower tendency for analysts to make heuristic decisions. This includes aligning more closely with consensus forecasts and issuing rounded forecasts. Further cross-sectional analysis suggests a more pronounced AI benefit for analysts with less firm-specific experience, highlighting AI’s potential in lowering in-formation acquisition costs. Intriguingly, we observe that the stock market does not fully recognize or appreciate these effects, undervaluing the forecast revisions made by AI-powered analysts. Overall, our evidence points to the advantageous impact of AI and ML technologies on the information pro-duction capabilities of financial analysts.
Leonard Yang Liu (University of Maryland) accepts the award for Outstanding FinTech Paper from SFA executive director, Ronnie Clayton.
International Finance, sponsored by the Southern Finance Association:
Production Outsourcing and Innovation: Evidence from China’s Pharmaceutical Industry
Shi Gu
I examine how removing barriers in production outsourcing affects firms’ innovation activities. I exploit a reform in China’s pharmaceutical industry that permits the outsourcing of drug production. Using a triple-difference identification strategy, I find that drug innovators without production facilities engage in more drug development (clinical trials) after the policy. Furthermore, for those firms constrained by limited financial resources, the increase in drug development comes at the expense of curtailing drug research (patent applications). On the extensive margin, the reform encourages the entry of new drug developers, but does not lead to more entry of pure drug researchers into the market. Overall, these results point to the pivotal role of production outsourcing in fostering entrepreneurship and innovation.
Shi Gu (Northwestern University) accepts the award for Outstanding International Finance Paper from SFA executive director, Ronnie Clayton.
Investments, sponsored by the American Association of Individual Investors (AAII):
MiFID II Research Unbundling: Cross-border Impact on Asset Managers
Richard Evans, Juan Pedro, Rafael Zambrana
MiFID II requires EU investment advisors to “unbundle” research costs from execution fees. We find evidence that this unbundling for EU Funds is accompanied by an increase in bundled commissions generated by their US counterparts. Specifically, for EU funds with US twins (a US-based fund with the same management team and investment style), the US twin exhibits higher bundled commissions (also known as “soft dollars”) and worse net performance than other US funds following MiFID II mandated unbundling. Correspondingly, EU twin funds appear to profit from this cross-subsidization, outperforming similar US twins. Our findings suggest that agency costs are not mitigated but merely shifted from a more regulated market to a less regulated one. We conclude that in global financial markets, only internationally coordinated regulatory actions are effective.
Richard Evans (UVA- Darden) accepts the award for Outstanding Investments Paper from SFA executive director, Ronnie Clayton.
Sustainability, sponsored by the Southern Finance Association:
She Means Business: From Courtroom Biases to Post-Bankruptcy Triumphs
Hadiye Aslan
The widespread adoption of smartphones enhances the importance of mobile apps in firms’ operations. This paper proposes a timely and easily accessible measure of mobile app usage using more than 54 million app reviews from Google Play and examines the implications of app usage to firm value. I find that a hedged portfolio that long (short) stocks with high (low) abnormal review volume from 2013 to 2022 yields an alpha ranging from 55.4 to 61.9 basis points per month under various risk models. App usage also positively correlates with contemporaneous profitability and revenue surprises. These results suggest that app reviews contain valuable information about firm fundamentals that is not fully recognized by the stock market.
Hadiye Aslan (Georgia State University) accepts the award for Outstanding Sustainability Paper from SFA executive director, Ronnie Clayton.
Doctoral Student Papers, sponsored by the Southern Finance Association:
The Impact of Mobile App Usage on Firm Value
Zheng Liu
We hypothesize that gender plays an important role in determining outcomes in business bankruptcy outcomes. We rely on the random assignment of cases among judges within a given jurisdiction to draw causal inference from our empirical analysis. Using a comprehensive dataset of individual sole proprietor and single-owner LLC bankruptcy petitions, we find that female business owners are 26 percent more likely to have their cases dismissed or converted to Chapter 7 compared to their male counterparts. The results are stronger if the presiding judge is a male and have less courtroom or industry-specific experience. We find that post-reorganization businesses owned by women are less likely to fail and show stronger sales growth compared to those owned by men. Finally, the occurrence of less favorable rulings towards women in bankruptcy court cases results in a reduction of female business start-ups by nine percent when compared to their male counterparts, with stronger effects in districts characterized by a higher degree of egalitarian values and where access to banking finance is more stringent.
Zheng Liu (University of Texas at Dallas) accepts the award for Outstanding Doctoral Student Paper from SFA executive director, Ronnie Clayton.
Regulating Inventors
Torin McFarland
I study how regulatory burden disrupts the careers of productive inventors. Using structural topic modeling and the text of compliance regulations, I develop a time-varying inventor-specific measure of regulatory burden. Inventors facing high burden exhibit decreased productivity and lower quality innovations. These results are concentrated in Star Inventors. A 1 standard deviation increase in time spent on compliance decreases Star patenting by 13.9% (14,900 patents annually in aggregate) and scaled citations by 2.8%. These effects are identified within inventor over time, net of employer-city trends, ruling out alternative explanations like time-varying employer innovation strategy or location-specific innovation factors. In terms of labor market outcomes, I find evidence consistent with a disutility channel: after experiencing increases in burden, inventors are more likely to switch jobs, and to seek positions at larger employers. Overall, the findings document the innovation consequences of regulatory burden, influencing both the quantity and quality of patented inventions, and the mobility of inventors.
Torin McFarland (Drexel University) accepts the award for Outstanding Doctoral Student Paper from SFA executive director, Ronnie Clayton.