The inaugural edition of the Esade Spring Workshop – organized by the Group for Research in Economics and Finance – took place on the 27 May 2022. The workshop fostered an academic interchange of state-of-the-art ideas in two main areas: information in financial markets and corporate finance & banking. The workshop discussed extremely high-quality theoretical and empirical papers by top researchers from around the world. It was a highly interactive event and contributed to Esade’s mission to foster dialogue, visibility, and extend the social impact of our research. This short article briefly discusses the main topics and ideas from the workshop.
Financial markets are plagued with information-related problems which have implications for investor behavior, corporate decisions, asset pricing, inequality, and market efficiency. An important idea in financial markets is how investor information horizons affect corporate investment. We live in a world where information horizons are shortening. Thierry Foucault from HEC Paris, one of the keynote speakers, showed that firms with short investment horizons invest more when short-term forecasts are more informative. Another source of corporate information are management forecasts. Marco Grotteria explained that analysts typically release forecasts that closely mimic management forecasts and showed that investors wait for analysts to confirm management estimates before fully reacting to them. Yue Yuan analyzed the consequences of the informational friction that happens when firms have better information than investors about the diversity of transaction methods in share repurchases made by firms. The authors find that firms that repurchase shares are likely to maximize long-term shareholder payoffs rather than boosting short-term share prices.
Another important question is related to the effects of the reduction of information acquisition costs due to improved information technology. Xavier Vives explained that this implies that traders over-invest in information acquisition and excessively trade on private information. In addition, Vives and co-authors prove that there is no optimal taxation policy based on the price of a financial asset and the volume of trades that implements efficiency in both information acquisition and trades. Information technology also has implications for the inequality gap. Roxana Mihet shows that technologies that reduce investor costs for participation, search, and data acquisition may have opposite effects on capital income inequality. Another paper by Jordi Mondria described how financial media editorial decisions to cover a firm have asset pricing implications for the reported firms – and for the non-reported firms. This raises the question on how information is incorporated into asset prices. Using a machine learning approach, Andriy Shkilko explained that price discovery is mainly affected by the state of the limit order book and by the price history.
Finally, keynote speaker Marcin Kacperczyk from Imperial College Business School in London, studied the effects of global volatility on the equity portfolio flows of institutional investors. Kacperczyk and co-authors find that equity allocations decrease with high volatility in both developed and emerging markets, with a stronger effect for foreign institutions. When volatility is high, foreign investors rebalance their portfolios from small-cap to large-cap stocks.
The session on corporate finance & banking began with an analysis of one of the main negative consequences of the Covid pandemics on economies around the globe: the disruption of supply chains. Mariassunta Giannetti from the Stockholm School of Economics, one of the keynote speakers, shed light on how the possibility of experiencing supply chain bottlenecks initially influences how suppliers and customer firms establish relationships. Giannetti and co-authors showed that firms with higher supply chain risk prefer to connect to closer and domestic suppliers, and to suppliers who are industry leaders. In the absence of financial constraints, firms with greater supply chain risk are also more likely to engage in vertical mergers and acquisitions (M&A). These findings indicate that disruptions due to pandemics could trigger a new wave of M&As.
Supply chain disruptions may not be the only way through which pandemics could spur M&As. Indeed, Matteo Crosignani of the Federal Reserve Bank of New York discussed how prospective fallen angel companies – that is, risky firms that are just above the investment grade rating cutoff – benefit from quantitative easing measures to finance risky acquisitions and increase market shares. And what are the consequences of M&As? Ernst Maug from the University of Mannheim documented how mergers imply a substantial reshuffling of the workers affected and that 50% of employees in the target firm tend to be laid off in the two years following the acquisition. Marieke Bos from the Stockholm School of Economics found that the stress and uncertainty surrounding mergers negatively affect employees and cause a deterioration in their mental health: with an increase in anxiety, depression, psychiatric medication usage, and even suicide.
Two of the most heatedly debated issues in the current banking system are the generous bonuses paid to top managers, and the way in which banks use data from their customers. Both topics were addressed in the workshop. Matthias Efing of HEC Paris showed that the bonuses for bank risk managers move together with the variable compensation of traders and loan officers. Interestingly, this feature does not imply a conflict of interest. Rather, Efing discussed the possibility that this positive association could be an efficient compensation scheme that may reduce excessive risk taking. Tania Babina of Columbia Business School established that the phenomenon of open banking – the option whereby bank customers own their own data and share them with third parties – leads to a 50% increase in fintech venture capital investment.
The second keynote speaker, Daniel Paravisini from the London School of Economics, showed that banks grant loans to firms in a way that allows each credit institution to specialize in specific industries or with exporters to very specific markets. While this pattern of lending specialization enables banks to become very efficient in some market segments, and thus raises the profitability of the sector, it also implies that shocks to specific parts of our economy could spur systemic risk insofar as they are amplified by the lack of diversification in bank loan portfolios.
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