Focus on Research

“Focus On Research” is a selection of recent working papers, publications or other news from the faculty of the Department of Finance and Business Economics at the Foster School of Business.

Award-Winning Papers:

Congratulations to Jonathan Brogaard of the Department of Finance and Business Economics and co-authors Terry Hendershott and Ryan Riordan, winners of the 2014 Michael J. Brennan prize. The Review of Financial Studies’ editorial board selected the paper, “High Frequency Trading and Price Discovery,” for recognition from the over-1,500 submissions to the journal. The prize is awarded annually to the best paper published in the Review of Financial Studies.

The work began as part of Professor Brogaard’s doctoral dissertation and provides insight into financial markets, specifically presenting evidence of the important role high frequency traders play in impounding information into prices.

Congratulations as well to Lance Young, whose paper, “What Does the PIN Model Identify as Private Information?” co-authored with Jefferson Duarte and Edwin Hu, recently won the Best Paper Award at the Multinational Finance Society Annual Conference.

The authors find that the Probability of Informed Trade (PIN) and Duarte-Young models fail to capture private information because they mistakenly associate variations in turnover with the arrival of private information.

Recent Working Papers:

Precautionary Savings with Risky Assets: When Cash is Not Cash
by Ran Duchin, Thomas Gilbert, Jarrad Harford and Christopher Hrdlicka

The dramatic increase in corporate cash holdings in recent years received considerable attention from academics and practitioners alike. This paper shows that contrary to the common belief, a large fraction of corporate “cash holdings” is invested in non-cash, risky financial assets such as corporate debt, equity, and mortgage-backed securities. These risky investments are undertaken by poorly-governed firms and discounted by 13-22% compared to cash or near-cash investments. This activity represents an unregulated asset management industry of more than $1.5 trillion, which questions the traditional boundaries of nonfinancial firms.

The Information Content of Credit Rating Changes: Evidence from Trading Volume
by Jonathan Brogaard, Jennifer Koski and Andrew Siegel

One of the mandates of the Dodd-Frank Act is to bring on-exchange many financial transactions that formerly traded over-the-counter. Many of these new instruments will be illiquid, trading infrequently, making them difficult for researchers to analyze. This paper develops a new non-parametric statistic to evaluate informational events in such illiquid markets. Applying the new statistic to the corporate bond market, the authors show that rating changes contain more value-relevant information than previously thought.

The Fetal Origins Hypothesis in Finance: Prenatal Environment and Investor Behavior
by Stephan Siegel, Henrik Cronqvist, Alessandro Previtero, and Roderick E. White

Individuals’ risk preferences and financial decisions are shaped by a large set of factors, stretching from peer effects to an individual’s genetic code. Here, we explore how the prenatal environment affects an individual’s financial behavior many decades later. Using a large set of Swedish twins, we measure the impact of in utero exposure to testosterone and nutrition on risk taking, trading, and gambling in financial markets. We find that the nine months in utero have a significant impact on investor behavior later in life.

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