Tax-loss selling and the January effect revisited: Evidence from municipal bond closed-end funds and exchange-traded funds
Allen Carrion, Jiang Zhang

We revisit the tax-loss selling hypothesis as an explanation for the January effect. We expand on prior empirical evidence from municipal bond closed-end funds (CEFs) by extending the sample period by 19 years and adding exchange-traded funds (ETFs). Our sample covers the introduction and rapid growth of municipal bond ETFs, significant changes to municipal bond market structure, and the modernization of tax-loss selling practices. The January effect in municipal bond CEFs has become stronger in recent years and is consistent with the tax-loss hypothesis. The January effect in municipal bond ETFs is smaller and cannot be explained by tax-loss selling.
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Climate risk and credit ratings
Nhu Tran, Cihan Uzmanoglu

We find weak evidence suggesting that cities’ credit ratings reflect their climate risk exposure. Using a large sample of US cities, we test whether cities with higher exposure to physical or transition risks of climate change have lower credit ratings. We also compare the ratings of coastal and similar noncoastal cities, and run difference-in-differences tests around events that raise climate change awareness. Moreover, we study the climate risk effect within cities and at the bond level. We observe a negative association only between the Hallegatte et al. (2013) sea-level-rise measure and ratings, and this association is solely driven by New Orleans, which had already experienced a significant climate event.
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CEO extraversion and the cost of equity capital
Biljana Adebambo, Robert M. Bowen, Shavin Malhotra, Pengcheng Zhu

We examine whether CEO extraversion, an important personality trait associated with leadership, is associated with firms’ expected cost of equity capital. We measure CEO extraversion using CEOs’ speech patterns during the unscripted portion of conference calls. After controlling for multiple CEO and firm-specific variables, we find a strong positive incremental association between CEO extraversion and firms’ expected cost of capital. Moreover, cost of equity increases when a more extraverted CEO replaces a less extraverted CEO. In addition, we find that firms with relatively extraverted CEOs take more risk and exhibit lower credit ratings, which is associated with higher cost of equity capital. These results are statistically and economically meaningful and do not appear to be driven by reverse causality, endogenous matching, look-ahead bias, or bias in analysts’ earnings forecast.
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Impacts of Firm Life Cycle on Bond Ratings and Yields
Kelly Cai, Heiwai Lee, Hui Zhu

We examine how firm life cycle affects ratings and costs of debt for public offers. We find that ratings for issuers in the introduction and decline stages are lower than those for growth and mature issuers. A similar U-shaped relation between life stage and yield spread, after controlling for credit rating, indicates that life stage affects cost of debt through multiple channels. Costs of debt are lower for growth and mature issuers than for introduction and decline issuers. Analyses of high-yield bonds and term to maturity suggest that the adverse effect on costs of debt for introduction and decline firms is associated with their elevated riskiness and greater information asymmetry.
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Threats to human capital: The effect of health risk on corporate financial policy
Özde Öztekin

I examine the relation between threats to human capital and corporate financial policy using morbidity and mortality data related to infectious diseases. I observe a strong association between deteriorating health and declines in leverage, which seems to be influenced by increasing human capital costs offsetting debt benefits. Firms consider reducing debt as a strategic response to perceived employee valuation of human capital insurance, which tends to be affected by a disease-induced rise in human capital costs. This association appears more pronounced in technology firms, distressed firms, and labor-intensive firms, and during higher disease-induced labor uncertainty, with some moderation by labor unions.
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Toeholds and information quality in common-value takeover auctions
Anna Dodonova

In this article I analyze the effect of the sensitivity of firm value on the information available to potential acquirers in common-value takeover auctions with toeholds. I show that the quality of information does not affect equilibrium when bidders have equal toeholds but has a significant effect when toeholds are different. My article demonstrates that increasing the relative information quality of the bidder with a smaller toehold makes both bidders bid more aggressively and leads to a higher price. I also analyze the combined effect of toeholds and information quality on equilibrium bidding strategies and discuss ways target shareholders can increase the expected final price.
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How does the JOBS act affect the rule 144A market?
Kelly Cai, Hui Zhu

In this article, we examine the effects of Title II of the Jumpstart Our Business Startups (JOBS) Act on the cost and issue size of Rule 144 debts for a sample from 2002 to 2019. We find that after the enactment of the JOBS Act, the average cost (issue size) of the Rule 144 A offers decreases (increases) significantly. The findings are robust after controlling for issue-, issuer-, and country-specific characteristics as well as market conditions. Evidence based on the propensity-score-matched sample, including public debt issues, subsample analyses, difference-in-differences tests, and alternative event windows, further shows that domestic firms benefit more from the JOBS Act as they have a greater reduction in the cost of debt and increase in the issue size. Overall, our results are consistent with the increased investor base hypothesis and suggest that Title II of the JOBS Act satisfies Congress’s goal of making it more cost efficient for Rule 144 A issuers.
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Social connections and innovation in diversified conglomerates
Tomas Jandik, Tatiana Salikhova

We study the effect of social connections between divisional managers and CEO on the scale and success of innovation activities in US diversified conglomerates. Divisional managers who previously worked or studied with the CEO file a greater number of patents during their tenure at the segment. These patents receive more citations in the future and represent a greater scientific and economic value. To provide causal support for our findings, we exploit plausibly exogenous variation in connections caused by CEO nonperformance-related retirements. The difference-in-differences estimation shows that after the CEO leaves the office, connected segments experience a drop in the quantity and quality of innovation activities. The effect of connections to the CEO on innovation outcomes is stronger in firms with high internal information asymmetry. These findings can imply that social connections help to mitigate adverse selection problems associated with risky R&D investments.
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Military independent directors and merger activity
Zhe Li, Megan Ramsey

In this article, we examine the relation between independent directors with past military service and merger activity. We find that firms with a greater proportion of independent directors with military experience complete fewer mergers, and the deals are of smaller value. Our results are robust to instrumental variable estimation. The reduction in merger and acquisition activity is concentrated in firms with weak CEOs, suggesting independent directors with military service do not improve firm agency problems.
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Intraday variation in trading costs: Evidence from the TSPP
Justin Cox, Bonnie Van Ness, Robert Van Ness

We examine changes in the intraday pattern of trading costs between pilot and control stocks during the US Securities and Exchange Commission tick size pilot program (TSPP). We find that intraday trading costs are relatively unchanged between pilot and control stocks in pre- and post-TSPP periods. We find that differences in trading costs between pilot and control stocks during the TSPP are lower in the morning and greater toward the close. We also find that intraday differences in quoted depth between pilot and control stocks during the TSPP is lower at the beginning of the day, increases during the day, and falls toward the close of trading.
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Bond pairs and the term structure
Antonio Diaz, Miles Livingston

In the US Treasury bond market, the existence of a bond pair (two bonds with the same maturity but different coupons) is shown to allow the computation of the zero-coupon interest rate for that maturity directly from the bond prices, as well as the zero-coupon interest rates for adjacent maturity bonds with the same number of coupon payments. Since the 2008–2009 financial crisis, the number of bond pairs has increased, allowing for the direct estimation from bond prices of the zero-coupon interest rates for an average of 180 individual maturities for bond maturities between 6 months and 30 years. The bond pairs approach outperforms popular yield-curve-fitting models in accurately reproducing original bond prices.
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Sink or swim? Managerial ability and trade credit
Md Mahmudul Hasan, Sayan Sarkar, Andrew C. Spieler

In this article, we examine the relation between managerial ability and the use of supplier-provided trade credit. The literature documents the positive effects of high-ability managers, including more accurate earnings forecasts, improved earnings quality, and overall improvement in corporate disclosure policies. We argue that customers (those seeking trade credit) with high-ability managers are better able to negotiate with suppliers, provide more transparent disclosure, and maintain strong relationships. Likewise, suppliers are willing to provide more trade credit to customers with high-ability managers because of reduced information asymmetry, creating an environment of trust and transparency. Our empirical results show that suppliers extend more trade credit to customers with high-ability managers and that this relation is more pronounced for financially constrained firms.
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