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How the SEC Helps Speedy Traders

November 13, 2014 Comments off

How the SEC Helps Speedy Traders
Source: Social Science Research Network

We show that the Securities and Exchange Commission’s system for disseminating market-moving information in securities filings gives some investors an advantage over others. We describe two systems — the SEC’s file transfer protocol (FTP) server and public dissemination service (PDS) — that give certain investors access to securities filings before the general public. While contemporaneous work on this issue is limited to insider filings, we show that both the FTP and PDS gaps are pervasive across all types of filings, including Form 8-K, which includes market-moving information such as corporate earnings. We show that FTP access gives investors a mean (median) 85 (11)-second lead time, and PDS gives investors a mean (median) 77 (10)-second lead time, before the filing is available on the SEC’s website.

We also provide evidence suggesting that investors had the opportunity to take advantage of this lead time to earn trading profits. In particular, we show that traders could earn economically and statistically significant returns by trading on either the FTP or PDS gaps. Moreover, even investors who waited as long as ninety seconds to execute trades on the FTP or PDS gaps could earn meaningful returns using this strategy. We also identify abnormal trading volume in the moments after PDS subscribers receive SEC filings.

Finally, our direct access to both FTP and PDS also allow us to document the changes to those systems that the SEC implemented after the public revelation of this issue in October 2014. We show that the SEC imposed a significant delay on the PDS service after the existence of the informational advantage was revealed. We also, however, show that, as of November 2014, PDS subscribers still receive some 37% of filings before the general public. We argue that lawmakers should consider reforms that would help the SEC develop a centralized information-dissemination system that is better suited for the high-speed dynamics of modern markets.

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How Does Government Borrowing Affect Corporate Financing and Investment?

November 12, 2014 Comments off

How Does Government Borrowing Affect Corporate Financing and Investment?
Source: Social Science Research Network

Using a novel dataset of accounting and market information that spans most publicly traded nonfinancial firms over the last century, we show that U.S. federal government debt issuance significantly affects corporate financial policies and balance sheets through its impact on investors’ portfolio allocations and the relative pricing of different assets. Government debt is strongly negatively correlated with corporate debt and investment, but strongly positively correlated with corporate liquidity. These relations are more pronounced in larger, less risky firms whose debt is a closer substitute for Treasuries. Indeed, we find a strong negative relation between the BAA-AAA yield spread and government debt, highlighting the greater sensitivity of more highly rated credit to variation in the supply of Treasuries. The channel through which this effect operates is investors’ portfolio decisions: domestic intermediaries actively substitute between lending to the federal government and the nonfinancial corporate sector. The relations between government debt and corporate policies, as well as the substitution between government and corporate debt by intermediaries, are stronger after 1970 when foreign demand increased competition for Treasury securities. In concert, our results suggest that large, financially healthy corporations act as liquidity providers by supplying relatively safe securities to investors when alternatives are in short supply, and that this financial strategy influences firms’ capital structures and investment policies.

Crony Capitalism, American Style: What Are We Talking About Here?

November 9, 2014 Comments off

Crony Capitalism, American Style: What Are We Talking About Here?
Source: Social Science Research Network

This paper seeks to reduce the ambiguity surrounding our understanding of what crony capitalism is, what it is not, what costs crony capitalism leaves in its wake, and how we might contain it.

Big Data and the Future for Privacy

October 29, 2014 Comments off

Big Data and the Future for Privacy
Source: Social Science Research Network

In our inevitable big data future, critics and skeptics argue that privacy will have no place. We disagree. When properly understood, privacy rules will be an essential and valuable part of our digital future, especially if we wish to retain the human values on which our political, social, and economic institutions have been built. In this paper, we make three simple points. First, we need to think differently about “privacy.” Privacy is not merely about keeping secrets, but about the rules we use to regulate information, which is and always has been in intermediate states between totally secret and known to all. Privacy rules are information rules, and in an information society, information rules are inevitable. Second, human values rather than privacy for privacy’s sake should animate our information rules. These must include protections for identity, equality, security, and trust. Third, we argue that privacy in our big data future can and must be secured in a variety of ways. Formal legal regulation will be necessary, but so too will “soft” regulation by entities like the Federal Trade Commission, and by the development of richer notions of big data ethics.

Should We Build More Large Dams? The Actual Costs of Hydropower Megaproject Development

October 27, 2014 Comments off

Should We Build More Large Dams? The Actual Costs of Hydropower Megaproject Development
Source: Social Science Research Network

A brisk building boom of hydropower mega-dams is underway from China to Brazil. Whether benefits of new dams will outweigh costs remains unresolved despite contentious debates. We investigate this question with the “outside view” or “reference class forecasting” based on literature on decision-making under uncertainty in psychology. We find overwhelming evidence that budgets are systematically biased below actual costs of large hydropower dams — excluding inflation, substantial debt servicing, environmental, and social costs. Using the largest and most reliable reference data of its kind and multilevel statistical techniques applied to large dams for the first time, we were successful in fitting parsimonious models to predict cost and schedule overruns. The outside view suggests that in most countries large hydropower dams will be too costly in absolute terms and take too long to build to deliver a positive risk-adjusted return unless suitable risk management measures outlined in this paper can be affordably provided. Policymakers, particularly in developing countries, are advised to prefer agile energy alternatives that can be built over shorter time horizons to energy megaprojects.

The Trouble with Amicus Facts

October 26, 2014 Comments off

The Trouble with Amicus Facts
Source: Social Science Research Network

The number of amicus curiae briefs filed at the Supreme Court is at an all-time high. Most observers, and even some of the Justices, believe that the best of these briefs are filed to supplement the Court’s understanding of facts. Supreme Court decisions quite often turn on generalized facts about the way the world works (Do violent video games harm children? Is a partial birth abortion ever medically necessary?) and to answer these questions the Justices are hungry for more information than the parties and the record can provide. The consensus is that amicus briefs helpfully add factual expertise to the Court’s decision-making.

The goal of this article is to chip away at that conventional wisdom. The trouble with amicus facts, I argue, is that today anyone can claim to be a factual expert. With the Internet, factual information is easily found and cheaply manufactured. Moreover, the amicus curiae has evolved significantly from its origin as an impartial “friend of the court.” Facts submitted by amici are now funneled through the screen of advocacy. The result is that the Court is inundated with eleventh-hour, untested, advocacy-motivated claims of factual expertise. And the Justices are listening. This article looks at the instances in recent years when a Supreme Court Justice cites an amicus for a statement of fact. It describes the way the brief, rather than the underlying factual source, is cited as authority and the failure of the parties to act as an adequate check. I challenge this process as potentially infecting the Supreme Court’s decisions with unreliable evidence, and I make suggestions for ways to reform it. It is time to rethink the expertise-providing role of the Supreme Court amicus and to refashion this old tool for the new purpose to which it is currently being used.

Mortgage Rates, Household Balance Sheets, and the Real Economy

October 13, 2014 Comments off

Mortgage Rates, Household Balance Sheets, and the Real Economy
Source: Social Science Research Network

This paper investigates the impact of lower mortgage rates on household balance sheets and other economic outcomes during the housing crisis. We use proprietary loan-level panel data matched to consumer credit records using borrowers’ Social Security numbers, which allows for accurate measurement of the effects. Our main focus is on borrowers with agency loans, which constitute the vast majority of U.S. mortgage borrowers. Relying on variation in the timing of resets of adjustable rate mortgages, we find that a sizable decline in mortgage payments ($150 per month on average) induces a significant drop in mortgage defaults, an increase in new financing of durable consumption (auto purchases) of more than 10% in relative terms, and an overall improvement in household credit standing. New financing of durable consumption by borrowers with lower housing wealth responds more to mortgage payment reduction relative to wealthier households. Credit-constrained households initially use more than 70% of the extra liquidity generated by mortgage rate reductions to repay credit card debt— a deleveraging response that can significantly restrict the ability of monetary policy to stimulate these households’ consumption. These findings also qualitatively hold in a sample of less-prevalent borrowers with private non-agency loans. We then use regional variation in mortgage contract types to explore the impact of lower mortgage rates on broader economic outcomes. Regions more exposed to mortgage rate declines saw a relatively faster recovery in house prices, increased durable (auto) consumption, and increased employment growth, with responses concentrated in the non-tradable sector. Our findings have implications for the pass-through of monetary policy to the real economy through mortgage contracts and household balance sheets.

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