Transaction Costs and the Stochastic Discount Factor

Authors : Ma Hao (Queen Mary University of London) ; Bianchi Daniele (Queen Mary University of London) ; Jiao Teng (Queen Mary University of London)

Presenter : Hao Ma (Queen Mary University of London)

Discussant : Victor DeMiguel (LBS)

Transaction costs determine which characteristic exposures are worth maintaining in equilibrium, yet standard stochastic discount factor (SDF) estimates often ignore them. We embed stock-specific trading costs into the no-arbitrage condition to identify a nonlinear SDF, which we estimate via adversarial neural networks across a large cross-section of U.S. equities. The transaction-cost-aware pricing kernel endogenously reallocates away from high-turnover fundamentals, improving cross-sectional pricing, mean-variance efficiency, and anomaly absorption. This reveals a taxonomy of implementation-dependent versus cost-invariant risk premia, with absorbed anomalies clustering among canonical limits-to-arbitrage signals. These findings hold across different cost specifications, market regimes, and a linear SDF specification.

The Macro Alibi: Subjective Risk Attribution in Analyst Scenarios

Authors : Zhou Kangying (Texas A&M University) ; Chen Wang (University of Notre Dame)

Presenter : Kangying Zhou (Texas A&M University)

Discussant : Paul Karehnke (ESCP)

Sell-side analysts over-attribute stocks’ downside scenarios to macroeconomic forces. We document this Macro Bear Bias in scenario-based valuation reports: conditional on the same market state, bear-case narratives emphasize aggregate macro risk far more than base- or bull-case narratives, even though realized CAPM R-squared is similar across realized bear, base, and bull outcomes. The bear-base macro-attention gap predicts systematic pessimism in subsequent base-case forecasts, and portfolios formed on a nonlinear bias-adjusted signal earn monthly CAPM alphas of up to 1.9%. Mechanism tests favor a cognitive availability-heuristic explanation — analysts anchor downside narratives on salient macro-crisis templates — over a strategic career-concerns explanation. Narrative templates analysts use to rationalize risk can distort analysts' numerical forecasts and asset prices.

Focus or Spread? Attention Allocation under High-Dimensional Uncertainty

Authors : Yun Hayong (Michigan State University)

Presenter : Hayong Yun (Michigan State University)

Discussant : Bertrand Tavin (EMLYON Business School)

This paper brings the rotate-then-quantize (RTQ) strategy of Zandieh et al. (2025) to economics and finance as a general tool for high-dimensional decision problems. RTQ converts a d-dimensional problem into done-dimensional quantization problems, addressing the curse of dimensionality. We illustrate with rational inattention. Conventional wisdom says to focus on a few variables and ignore the rest; RTQ accommodates non-Gaussian priors with discrete signals as Sims (2006) conjectured and gives a computable criterion for focus vs broad coverage. Portfolio-choice tests on CRSP merged with the LSEG 13F panel over five decades are consistent with these predictions.

Investor Democracy

Authors : van der Kroft Bram (MIT) ; Bauer Rob (Maastricht University) ; Cooper Emmeline (Maastricht University) ; van der Kroft Bram (MIT) ; Smeets Paul (Amsterdam University)

Presenter : Bram van der Kroft (MIT)

Discussant : Olivier David Zerbib (ENSAE Paris)

Investment decisions are often delegated to financial intermediaries, yet beneficiaries rarely have meaningful influence over how their capital is invested. This creates a democratic deficit, especially when investment choices involve trade-offs between financial returns and social impact. We study how considered social preferences can be revealed in the field using deliberative democracy. Partnering with a large Dutch pension fund, we conduct two field experiments that combine a deliberative mini-public with a binding maxi-public vote. In the mini-public, 49 randomly selected members participate in a three-day, in-person process of structured peer deliberation and balanced expert briefings on sustainable investing. After deliberation, participants formulate and vote on recommendations for the pension board. Deliberation does not change how much financial return members are willing to sacrifice for sustainable investing. What changes is how members reason about the trade-off. Deliberation increases self-reported investment knowledge and, consistent with this, participants shift from rule-based reasoning about principles toward a focus on concrete societal outcomes. Consequentialist views rise from 20.9% to 44.2%, while deontological views fall from 34.9% to 9.3%. Mini-public members recommend expanding impact investing. To test whether this reflects the broader membership, the board puts the question to a binding vote among all members, of which 13,619 participate, choosing between stopping, maintaining, or expanding impact investing under the explicit understanding that the outcome determines actual portfolio allocations. We communicate to participants that impact investing can lower participants' pension payments at retirement but may have a positive environmental and social impact. Despite the financial trade-off, a clear plurality of 47.9% favors expansion, against only 15.6% who favor stopping. The board commits to increasing impact investments by 300 million to 1.2 billion euros. The mini-maxi-public elicits considered social preferences, translates them into consequential investment decisions, and builds support across political divides.

Sustainable Investment Decisions: Heterogeneous Beliefs and Preferences

Authors : Meier Iwan (HEC Montréal) ; d'Astous Philippe (HEC Montréal) ; Michaud Pierre-Carl (HEC Montréal)

Presenter : Iwan Meier (HEC Montréal)

Discussant : Noemie Bucourt (Rotman School of Management, University of Toronto)

We analyze whether households' investment decisions in ESG assets can be explained by their preferences for sustainability or by their beliefs about future returns. To address this question, we develop a structural discrete-choice model with heterogeneous beliefs and preferences. Using a large-scale survey with randomized mutual fund allocation scenarios and elicited return expectations, we recover individual-level willingness to pay for sustainability (and financial risk). Our specification does not restrict investors’ willingness to pay for sustainability to be positive, allowing the data to determine both the magnitude and direction of sustainability preferences at the individual level. The results show that beliefs about expected returns are the driving factor for investing in sustainable assets and non-pecuniary preferences for sustainability play only a secondary role. Moreover, respondents’ return beliefs exceed the beliefs implied by the model’s equilibrium predictions.

Natural Disasters, Property Insurance, and Housing Markets

Authors : Mabille Pierre (INSEAD) ; Boutros Michael (University of Toronto) ; Clara Nuno (University of Toronto)

Presenter : Pierre Mabille (INSEAD)

Discussant : Poorya Kabir (NUS)

We study how local climate risk affects the housing market of a country and household finances through moving and property insurance channels. We develop a dynamic spatial equilibrium housing model in which households choose location, tenure, and property insurance coverage across regions with heterogeneous exposure to climate risk. Spatial mobility and insurance decisions interact to shape house prices and population distributions across regions, and hence exposure to climate risk. The model generates realistic patterns of insurance demand, including underinsurance and strong heterogeneity across wealth, age, and regions. Our results underscore the joint importance of endogenous spatial sorting and property insurance choices to evaluate the housing market impacts of climate change.

Central Clearing, Counterparty Risk, and Repo Specialness

Authors : Mazzari Francesco (Swiss Finance Institute and Università della Svizzera Italiana) ; Dieler Tobias (University of Bristol) ; Piotr Danisewicz (University of Bristol) ; Julian Metzler (European Central Bank and University of Bristol) ; Loriano Mancini (USI Lugano and SFI)

Presenter : Francesco Mazzari (Swiss Finance Institute and Università della Svizzera Italiana)

Discussant : Davide Tomio (Texas A&M)

European repo transactions clear bilaterally (OTC) or through central counterparties (CCPs). Using transaction-level data from the euro-area repo market, we document that borrowing costs for identical securities are systematically higher in OTC trades than in CCP-cleared trades, and that this differential compresses sharply during the March 2020 COVID- 19 shock. We develop a model in which repo rates are convex in borrower risk. Because OTC markets price borrower-specific risk while CCPs pool counterparties, this convexity generates the level gap and its compression under stress. The model further predicts that compression is weaker for riskier borrowers and stronger for higher-quality collateral, which we confirm empirically.

LRISK: Systemic Liquidity Risk in Mutual Funds

Authors : van Dijk Floris (Banque de France, CREST-IPP) ; Jourde Tristan (Banque de France) ; Saillard Martin (Banque de France)

Presenter : Floris van Dijk (Banque de France, CREST-IPP)

Discussant : Laurent Barras (University of Luxembourg)

This paper introduces LRISK, a forward-looking measure of systemic liquidity risk in mutual funds that quantifies aggregate price pressure under a systemic redemption shock. LRISK captures fire-sale spillovers through flow commonality, portfolio similarity, and liquidity spirals. Applied to U.S. corporate bond funds from 2011 to 2024, LRISK predicts bond returns during the COVID-19 crisis, fund underperformance during redemption shocks, and the adoption of redemption in kind. At the aggregate level, LRISK serves as an early warning signal, forecasting market distress up to two quarters ahead. A system-wide optimization shows that coordinated liquidation policies could mitigate spillovers from uncoordinated sales, highlighting the role of macroprudential tools.

Restricted Investor Access and the Cost of Debt: The Case of Privately Placed Bonds

Authors : Ivashchenko Alexey (VU Amsterdam) ; Artiga Gonzalez Tanja (VU Amsterdam) ; Rijken Herbert (VU Amsterdam) ; Schauten Marc (VU Amsterdam)

Presenter : Alexey Ivashchenko (VU Amsterdam)

Discussant : Madhu Kalimipalli (Wilfrid Laurier University)

This paper empirically investigates how restrictions on investor access to the corporate bond market affect the cost of debt for U.S. firms. Exploiting a quasi-natural experiment—the 2020 SEC reform that admitted previously excluded investors to the market for privately placed U.S. corporate bonds (Rule 144A)—we identify a causal link between investor access and corporate borrowing costs. Following the reform, the yield spread discount for privately placed bonds issued before the reform dropped by 18 basis points (relative to public placements), or 51\% of the pre-reform level. Primary-market yield spread discount for newly issued privately placed bonds narrowed by 30-35 basis points. These effects are most pronounced for investment-grade issuers, pointing to the reduction in resale liquidity risk as the main channel for valuation improvements. The gap in trading volume between private and public placements also reduced by almost 30\% post-reform. Investment-grade firms react to better borrowing terms by increasing leverage and shareholder payouts.

The AI Proxy Advisor

Authors : Couvert Maxime (The University of Hong Kong) ; Bakker Michiel (Massachusetts Institute of Technology) ; Roni Michaely (Massachusetts Institute of Technology) ; Demir Sercan (University of Cologne)

Presenter : Maxime Couvert (The University of Hong Kong)

Discussant : Mo Pourmohammadi (Yale University)

We examine whether artificial intelligence (AI) can help shareholders make value-enhancing voting decisions. Using a causal machine learning framework that combines regression discontinuity with ensemble prediction models, we show that votes aligned with AI recommendations generate higher cumulative abnormal returns and lead to superior long-term firm performance. Proxy advisors not only do not appear to make value-enhancing recommendations but also fail to improve AI guidance. One reason shareholders fail to vote optimally is their excessive support for management proposals. By capturing complex nonlinear relationships between proposals and firm characteristics, AI consistently identifies strategies overlooked by both shareholders and proxy advisors.

Managerial Attention to Financial Markets: Evidence from Managers’ Own Discussion

Authors : Ran Zhenkai (Hong Kong Polytechnic University)

Presenter : Zhenkai Ran (Hong Kong Polytechnic University)

I develop a novel, direct measure of managerial attention to financial markets using managers’ own discussion on market conditions during earnings calls covering nearly all U.S. public firms from 2007–2024. Attention varies widely across industries, across firms, and within firms over time. Managers who pay greater attention to markets exhibit higher investment-price sensitivity. Attention also enhances managers’ ability to access external capital when financing needs arise, at least through enabling them to respond more effectively to changing market conditions. Ultimately, managerial attention is a first-order behavioral mechanism through which financial markets exert real effects.

Commoditize Your Complement: Strategic Open-Source Releases and the Cannibalization of Rival Firms

Authors : Won Peter (University of Utah)

Presenter : Peter Won (University of Utah)

Discussant : Martina Fraschini (University of Luxembourg)

Why do firms release open-source software (OSS) for free? I show that firms strategically release OSS to commoditize complementary product markets and erode rivals' proprietary rents. Using the staggered release of GitHub repositories, I find that the equity market prices each release as a directed wealth transfer from complement rivals to the releasing platform: within a three-day window the platform gains $313 billion while complement rivals lose $153 billion. This displacement is concentrated among complementary peers, while direct substitutes show no measurable reaction. Exposed rivals also lose 5.2% of sales, cut R&D by 14.8%, and reallocate engineering talent to the platform. Free OSS emerges as a non-priced competitive weapon outside the reach of traditional antitrust.

Partisan Product Pricing

Authors : Dupont Quentin (Georgetown University) ; Duchin Ran (Boston College) ; Freed Paul (Boston College) ; Hackney John (University of Arkansas)

Presenter : Quentin Dupont (Georgetown University)

Discussant : Christoph Schiller (Ohio State)

We study how political beliefs shape price-setting decisions within firms. We link store thousand of convenience store managers’ political affiliation to pricing behavior at these stores. We show that managers adjust prices differently in response to inflation depending on their political beliefs. For identification, we exploit variation in the political beliefs of managers across stores selling identical products on the same street. During the Biden administration, a 1 p.p. rise in inflation is associated with a pass-through to prices that is 21% larger at Republican-managed stores than at Democrat-managed stores. These effects dominate in markets with weaker competition, where managers have greater pricing discretion, and operate through the size of adjustments rather than the frequency.

The Real Cost of Benchmarking

Authors : Kontz Christian (University of Notre Dame) ; Hanson Sebastian

Presenter : Christian Kontz (University of Notre Dame)

Benchmark-linked capital flows increase firms' CAPM βs, thereby raising managers' perceived cost of equity and reducing investment. Using exogenous variation from Russell and S&P 500 reconstitutions, we show that inclusion in a benchmark stock index increases a stock's CAPM β. Managers interpret the higher β as a higher cost of equity and reduce investment. Consistent with this mechanism, benchmark inclusion also raises the perceived cost of equity among stock analysts and regulators. Industries with larger increases in βs due to benchmarking have accumulated less capital over the past two decades. Benchmark-induced changes in the cross-section of CAPM βs do not cancel out but affect aggregate investment because higher βs fall on many firms with high investment elasticities, while lower β

Consequences of Misreporting

Authors : Celentano Francesco (University of Lausanne and Swiss Finance Institute) ; Choi Jason (University of Toronto) ; Coyle Philip (University of Toronto)

Presenter : Francesco Celentano (University of Lausanne and Swiss Finance Institute)

Discussant : Thomas David (ESCP)

Detected misreporting triggers stock-price declines, reputational damage, and monetary sanctions, yet misreporting persists. We develop and estimate a dynamic heterogeneous firm model in which managers inflate reported profits to lower the cost of external finance, at the risk of detection and the loss of access to manipulation. Estimated on U.S. firm-level data, each one-percentage-point increase in reported profitability lowers the per-unit cost of external finance by 1.8%; the directly punitive components of detection are quantitatively small. Almost the entire cost of being flagged operates through two channels: the firm cannot use misreporting to soften its financing wedge, and the wedge is priced off true rather than inflated profits. Prohibiting misreporting reduces shareholder value by 3.1%, of which two-thirds reflect the option value of the channel.

Banks, Firms, and Households: Credit Shock Amplification and Real Effects

Authors : Cao Jin (Norges Bank) ; Huylebroek Cédric (KU Leuven)

Presenter : Jin Cao (Norges Bank)

Discussant : Guillaume Vuillemey (HEC Paris)

While a large literature has examined how bank credit shocks affect firms or households, it has not accounted for the fact that such shocks may simultaneously impact both. In this paper, we overcome this limitation and disentangle the real impact of a credit market disruption into the effect of firm-side credit shocks, individual-side credit shocks, and their interaction. To this end, we construct a novel dataset linking Norwegian employees to their employers and their respective bank relationships. We show that individuals’ labor income and consumption decline by 1–2% when only they or only their employer face a credit shock, compared to the benchmark where neither do. However, when individuals and their employer simultaneously face a credit shock, labor income and consumption decline by nearly 6%, revealing a strong amplification effect. This amplification arises because personal credit constraints hinder individuals’ consumption smoothing and job search when confronted with wage cuts or layoffs triggered by their employer’s credit constraints. Our findings suggest that this mechanism also shapes the aggregate transmission of credit shocks.

Banking on Artificial Intelligence: Information Hold-Up and Transformation of Relationship Lending

Authors : Allen N. Berger, University of South Carolina; Omrane Guedhami, University of South Carolina; Zheyu Qi, University of South Carolina; and Raluca A. Roman, Federal Reserve Bank of Philadelphia

Presenter : Zheyu Qi (University of South Carolina)

Discussant : Filippo de Marco (Bocconi University)

We find bank AI adoption raises corporate loan spreads by 9–13 bps, with propensity-score matching and Bartik-style instrumenAdd to Par défaut shortcutsts confirming robustness. AI converts soft information into proprietary hard information, deepening rather than reducing information asymmetry. Relationship price discounts erode at AI-adopting banks, yet relationships persist through nonprice terms – smaller, shorter loans with fewer covenants – shifting function from spread reduction to rollover discipline. Machine learning (1995–2010) reprices public borrowers; deep learning and NLP (2011–2023) shift burdens toward private borrowers. Borrowers adopting AI face lower spreads, but this discount vanishes at AI-adopting banks, consistent with rent extraction over efficiency gains.

Patent Disclosure and Reliance on External Financing

Authors : Bowen Donald (Lehigh University) ; xWeiss Hanley Kathleen Weiss Hanley (Lehigh University) ; Kwon Sungjoung (Lehigh University) ; Mann William (Emory University) ; Yu Qianqian (Lehigh University)

Presenter : Donald Bowen (Lehigh University)

Discussant : Mike Mariathasan (KU Leuven)

We use LLMs to decompose patent disclosure complexity into fundamental and strategic obfuscation components. Obscure disclosure deters competitor innovation and reduces infringement litigation but decreases patents' financing capacity. Using examiner strictness as an instrument, we show obfuscation reduces both competitor innovation and the probability of litigation while lowering the rate at which patents are sold or pledged as collateral. Following policy or financing shocks, firms' obfuscation responses depend on their reliance on external finance. Our findings reveal a tradeoff: firms balance opaque disclosure in patents against their need to attract external capital, a new channel through which financing can shape the trajectory of innovation.

Time-Series Momentum across the Capital Structure

Authors : Tancheva Zhaneta (BI Norwegian Business School) ; Gruenthaler Thomas (Tilburg University) ; Manconi Alberto (Tilburg University) ; de Roon Frans (Tilburg University)

Presenter : Zhaneta Tancheva (BI Norwegian Business School)

Discussant : Patrick Augustin (McGill University)

We develop a parsimonious rational explanation for momentum based on a structural credit-risk model augmented with implied stochastic volatility. In this framework, equity’s option-like payoff generates a trade-off between leverage and variance effects, producing momentum when the variance channel dominates and forecasting momentum crashes when the leverage channel prevails. The theory yields a simple closed-form condition for momentum in equities and bonds and implies stronger momentum for firms with higher volatility and leverage, matching key empirical patterns. In U.S. equities, the prediction is supported in the data, with momentum confined to firms satisfying the condition and returns increasing monotonically in its strength. The model predicts little scope for broad momentum in corporate bonds, which is confirmed in the data. Thus, a single structural mechanism in capital structure organizes momentum across assets.

Forecast Dispersion and Price Reaction to Macroeconomic News

Authors : Badidi Samia (Nanyang Technological University)

Presenter : Samia Badidi (Nanyang Technological University)

Discussant : Paola Cocoma (Frankfurt School of Finance and Management)

Using data on 25 major U.S. macroeconomic announcements, I document that forecast dispersion has a strong negative effect on market reactions, challenging the conventional interpretation of dispersion as a proxy for uncertainty. To reconcile this puzzle, I develop a noisy rational expectations model in which the informational content of dispersion depends on the share of experienced analysts. When the forecaster pool is primarily experienced, low dispersion indicates precise pre-announcement information, reducing the announcement's price impact. Conversely, when the pool is inexperienced, low dispersion reflects shrinkage toward noisy common information, increasing price impact. Using lagged analyst experience as an instrument, I confirm that the relationship between dispersion and price impact switches sign depending on the share of experienced analysts.

Financial Integration and the Equity Term Structure: Insights from 150 Years of UK Data

Authors : Sandoval Jan (ESADE Business School) ; Kvaerner Jens (BI Norwegian Business School) ; Ole Wilms (BI Norwegian Business School)

Presenter : Jan Sandoval (ESADE Business School)

Discussant : Julien Penasse (University of Luxembourg)

We recover the term structure of equity risk premia in the UK from 1870 to 2019 and develop an international asset pricing model to interpret the results. Four main findings emerge. First, risk premia have declined markedly since the 1980s, particularly at short maturities, leading to a steeper equity term structure in the post-1980 period. Second, over the same time period, correlations in risk premia between the UK and the U.S. have risen substantially, particularly at short horizons. Third, viewed over the full 150-year sample, the equity term structure is upward-sloping on average, and investors demand higher compensation for bearing long-term than short-term equity risk. Fourth, the term structure flattens during periods of financial distress, driven by a disproportionate increase in short-term risk premia. Our international asset-pricing model attributes the post-1980 steepening of the term structure to greater financial integration, via enhanced cross-border diversification, which reduces short-term risk premia more than long-term premia.

The Propagation of Environmental Risk Through Production Networks: Borrowing Cost Effects

Authors : Lavia Alessandro Dario (University of Turin) ; Luciano Elisa (University of Turin, CCA, Bachelier Society)

Presenter : Alessandro Dario Lavia (University of Turin)

Discussant : Iwan Meier (HEC Montréal)

We develop a general equilibrium model with firms, banks, and households to explain how climate transition risk affects borrowing costs. Firms are linked through production networks and make rigid production decisions before shocks realize, generating endogenous default risk. Banks price debt based on expected defaults. In equilibrium, borrowing costs depend not only on firms’ exposure to transition risk but also on the carbon intensity of their suppliers. We calibrate the model using input-output data and borrowing-cost spreads across sectors, showing that small shock differences generate sizable financing premia through network amplification. Empirically, we find that lenders price direct and network carbon exposure, consistent with the model.

How Does Competition Affect Firms’ Carbon Performance? Firm-Level Evidence from Tariff Cuts

Authors : Kathan Manuel (University of Augsburg) ; Roeder Raphaela (University of Augsburg) ; Utz Sebastian (University of Augsburg) ; Nerlinger Martin (University of St.Gallen)

Presenter : Manuel Kathan (University of Augsburg)

Discussant : Bram van der Kroft (MIT)

We examine how changes in competition affect firms’ carbon performance. Exploiting reductions in import tariffs as a quasi-natural experiment that increases competitive pressure, we find that stronger competition improves firms’ carbon efficiency through lower Scope 1 and 2 emission intensities. These results remain robust to alternative specifications, heterogeneous treatment effects, and placebo tests. Mechanism analyses indicate systematic differences in firms’ strategic responses. High-emission-intensity firms tend to adopt visible environmental actions and reallocate resources toward intangible assets, whereas low-emission firms increase investment and internal financing activities. Overall, our results highlight competition as a determinant of corporate decarbonization, suggesting that market forces can complement regulatory approaches to improving firms’ environmental performance.

Does ESG Information Deliver Investment Value? A High-Dimensional Portfolio Perspective

Authors : Bruno Giovanni (Scientific Beta - SGX) ; Bruno Giovanni (Scientific Beta - SGX) ; Felix Goltz (Scientific Beta - SGX) ; Antoine Naly (Scientific Beta - SGX)

Presenter : Giovanni Bruno (Scientific Beta - SGX)

Discussant : Floris van Dijk (CREST)

This paper assesses whether ESG information helps build more efficient portfolios. Instead of treating ESG as a monolith, we build on a high dimensional information set of more than 200 ESG characteristics and employ a host of robust portfolio construction methods designed to avoid overfitting in this setting. Our results show that ESG information is not redundant, increasing the portfolio Sharpe ratio by up to 25 percent in-sample, compared with using financial information alone. However, out-of-sample benefits are insignificant as estimation errors offset any information advantage. We also show that optimal use of ESG information does not necessarily imply positive sustainability, as portfolios contain both green tilts to factors like human rights and brown tilts to factors like sin stocks. Furthermore, using ESG metrics provides no measurable risk reduction compared with using financial characteristics alone. Our findings suggest that ESG integration fails to deliver financial benefits out of sample.

Monetary Policy and Corporate Investment: Sufficient Statistics with Heterogeneous Firms

Authors : Hubert de Fraisse Antoine (London School of Economics) ; Maxted Peter (UC Berkeley Haas) ; Sangani Kunal (UC Berkeley Haas) ; Sraer David (UC Berkeley Haas)

Presenter : Antoine Hubert de Fraisse (London School of Economics)

What is the effect of monetary policy on corporate investment? To answer this question, recent contributions have exploited high-frequency monetary policy shocks aggregated at the quarterly level. We show that these shocks are endogenous to the business cycle, and thus are unlikely to be valid instruments. As an alternative, we propose a simple methodology based on Q-theory that exploits high-frequency identification but does not suffer from this bias. Empirically, our analysis uncovers a significant role for firm-level heterogeneity in driving the aggregate response of corporate investment to monetary policy.

Why Don't Old Firms Do New Things?

Authors : Lyonnet Victor (University of Michigan) ; Crouzet Nicolas (Northwestern Kellogg) ; He Zhiguo (Northwestern Kellogg) ; Ma Yueran (Chicago Booth)

Presenter : Victor Lyonnet (University of Michigan)

Since at least Schumpeter (1942), new firms have been widely viewed as the driving force for implementing new technologies. Yet limited economics research explains when and why new technologies require new firms. We examine the view that old firms struggle especially when new technologies lead to different organizational workstyles (based on occupation composition and their corresponding workstyles), which may clash with their existing business model. In the data, young firms grow significantly faster than old firms when new technologies in an industry generate greater workstyle changes (due to the types of workers they require), whereas the advantage of young firms is not related to the sheer volume of new technologies (e.g., the number of all or important patents). We also find that new technologies associated with greater workstyle changes are more likely to be implemented by young firms, as measured using AI assessment of Wikipedia articles. These results highlight the role of organizational frictions in shaping companies’ adaptability, and provide new perspectives for the Coase (1937) boundary of the firm question. Investment in entrepreneurship is especially important when innovations alter organizational workstyles.

The Geoeconomics of Imports: Evidence from UN Security Council Elections

Authors : Chen Yanduo (Singapore Management University) ; Wu Jing

Presenter : Yanduo Chen (Singapore Management University)

This paper examines how the United States utilizes imports as a tool of geoeconomic statecraft and how firms participate in it. Exploiting elections to the United Nations Security Council, we show that U.S. firms increase imports from a country when it rotates onto the Council. This increase is concentrated in products where elected countries lack comparative advantage, reflecting strategic reallocation of U.S. imports. Consistent with geopolitical motivations, the effect is concentrated among swing countries and is more pronounced when the elected country holds greater agenda-setting power. We identify two channels of import politicization. First, imports from newly elected countries face lower duty rates. Second, the increase is disproportionately driven by firms whose top lobbying issues are overseen by senators who serve concurrently on the Foreign Relations Committee, with the effect increasing in senator seniority. Finally, countries with larger import increases during their UNSC terms exhibit greater voting and rhetoric alignment.

Path-Dependent Alpha: Optimal Contracts, Career Dynamics, and the Cross-Section of Fund Performance

Authors : TENA Vincent (Université Paris Dauphine) ; Darolles Serge (Université Paris Dauphine)

Presenter : Vincent TENA (Université Paris Dauphine)

Discussant : Alexandru Barbu (INSEAD)

We develop a general equilibrium model of active asset management in which optimal contracts generate endogenous alpha heterogeneity through path-dependent career dynamics. Effort, pay, and AUM are functions of one state variable, the manager's continuation value, which evolves with performance. Even with ex ante identical managers, the cross-section of alpha is heterogeneous: history, not type, determines performance. Effort costs scale sublinearly with AUM, producing a hump-shaped effort function and endogenous diseconomies of scale. Structural estimation on hedge fund data matches median tenure, the negative-alpha share, and extreme AUM concentration. Convex capital flows and path dependence generate a superstar effect without heterogeneity in ability.

Gender Disparities in Mutual Fund Industry: Investor Flows, Selection Bias, and Managerial Skill

Authors : Fu Hsuan (Université Laval) ; Chiu Li-Ting (Bentley University)

Presenter : Hsuan Fu (Université Laval)

Discussant : Romain Boulland (ESSEC Business School)

This paper examines the structural barriers that contribute to the underrepresentation of women in the US equity mutual fund industry. Using data from 1992 to 2022, we identify two primary frictions: a supply-side selection bias, where female managers are disproportionately assigned to funds with poor historical performance, and a demand-side investor bias characterized by asymmetric flow-to-performance sensitivity. Despite these disadvantageous conditions and subsequent capital flight, female managers demonstrate post-appointment performance comparable to their male peers. These findings suggest that observed performance gaps are artifacts of endogenous assignment and investor behavior rather than differences in managerial skill.

Advising the Advisors: Evidence from ETFs

Authors : Gerasimova Nataliya (BI Norwegian Business School) ; Brogaard Jonathan (David Eccles School of Business, University of Utah) ; Liu Ying (David Eccles School of Business, University of Utah)

Presenter : Nataliya Gerasimova (BI Norwegian Business School)

Discussant : Pekka Honkanen (UGA Georgia)

This paper is among the first to study the $7.96 trillion model portfolio marketplace. Using novel Morningstar data, we show that these recommendations heavily influence ETF flows and alter investor behavior by weakening flow-performance sensitivity. We document a self-recommendation bias: providers disproportionately recommend affiliated ETFs, which carry higher fees and lower liquidity than unaffiliated alternatives. This favoritism is unjustified, as models with affiliated funds fail to generate superior returns or alphas. Our findings suggest that providers exploit their dual role as managers and advisors to steer assets into proprietary products, highlighting significant agency conflicts in the wealth management industry.

Beliefs about the climate impact of green investing

Authors : Kölbel Julian (University of St. Gallen) ; Heeb Florian (Leibniz Institute for Financial Research SAFE, Goethe University Frankfurt) ; Weder Camilla (Leibniz Institute for Financial Research SAFE, Goethe University Frankfurt)

Presenter : Julian Kölbel (University of St. Gallen)

Discussant : Louiza Bartzoka (Copenhagen Business School)

This paper surveys beliefs about the climate impact of green investing among academic experts and retail investors. Using the views of academic experts as a benchmark, we show that retail investors have overly optimistic climate impact beliefs. While most academic experts do not believe that a typical green fund has a meaningful climate impact, the vast majority of retail investors do. The median retail investor expects a €10,000 green investment to offset 10% of an average person's carbon footprint. By contrast, the median estimate among academic experts is 2%, with 0% being the most common estimate. When informed of academic experts’ views, retail investors reduce their climate impact beliefs and willingness to pay for the green fund.

Does Paying for Data Change Investment Decisions?

Authors : Zoican Marius (University of Calgary) ; Chapkovski Philipp (University of Duisburg-Essen) ; Isik Arzu (University of Duisburg-Essen) ; Khapko Mariana (University of Toronto)

Presenter : Marius Zoican (University of Calgary)

Discussant : Akash Raja (Copenhagen Business School)

Do investors trade differently when paying for market data versus getting it for free? In an investment experiment, we randomize whether subjects pay for or freely receive identical order flow data. Payment inflates perceived data informativeness by 11\%, increases responsiveness of return forecasts to data by 31\%, and leads to 14\% larger forecast errors. We further document a sunk-cost mechanism concentrated among low financial literacy investors: payment raises investment levels while reducing the response of investment to own return forecasts. Offering data as a paid add-on distorts beliefs and behaviour, with the burden falling disproportionately on the least sophisticated investors.

Self-Discovery in Real Investment Decisions

Authors : Pirinsky Christo (University of Central Florida) ; Tseng Michael (University of Central Florida)

Presenter : Christo Pirinsky (University of Central Florida)

We analyze investment decisions when firms are uncertain about their ability to develop a new technology. Investing exposes firms to downside risk but generates self-knowledge about their fit with the technology, a process we refer to as diagnostic learning. We show that the prospect of discovering each firm’s comparative advantage incentivizes firms to invest more and earlier. In the aggregate, diagnostic learning gives rise to boom–bust investment patterns, with a surge in initial investment followed by high failure and exit rates. This pattern is driven by learning about idiosyncratic fit and contrasts with the smooth adjustment dynamics of Bayesian learning models in which uncertainty concerns a systematic payoff component. The boom–bust effect is stronger when the technology engages broader skill sets, the investor base is more impatient, and capital is more abundant.

Value Is in the Eye of the Beholder: Strategic Marking in Private Credit

Authors : Marei Sameh (Esade Business School)

Presenter : Sameh Marei (Esade Business School)

Discussant : Juan F. Imbet (EDHEC Business School)

I study whether loan valuations reported by private credit funds reflect fund-level incentives. Comparing valuations assigned by different funds to the same loan at the same point in time, I find that funds report higher loan valuations precisely when their contemporaneous realized performance is weaker. Additional analyses of cross-sectional patterns show that this behavior is consistent with strategic marking that smooths reported returns. The effect is strongest in settings where valuation discretion is plausibly greater and where deviations matter most for reported performance and net asset value. The effect intensifies when funds have stronger incentives to relax binding leverage constraints through higher reported net asset values. The results cannot be explained by other alternative channels such as asymmetric information, portfolio selection, and delayed updating of marks. These findings highlight an agency-based component of valuation in private credit and have implications for the reliability of reported net asset values and for the monitoring of financial stability risks in stress episodes.

Real time risk dynamics in the financial sector

Authors : Corvino Raffaele (NEOMA Business School) ; Maglione Federico (University of Florence) ; Berardino Palazzo (University of Florence)

Presenter : Raffaele Corvino (NEOMA Business School)

Discussant : Valère Fourel (ECB and Banque de France)

Building on the structural model of default proposed by Nagel and Purnanandam (2020) [Banks’ Risk Dynamics and Distance to Default. Review of Financial Studies, 2020, 33, 2421-2467], we develop a semi-analytical, market-based framework to estimate default risk for a wide range of financial institutions – including banks, insurance companies, and broker-dealers – whose business models involve leverage and maturity transformation. Our approach accounts for the compound option nature of financial firms’ equity and the staggered maturity of asset portfolios, enabling the construction of a novel, multi-dimensional distance-to-default measure. Using observable equity and CDS market prices, we estimate key structural parameters – including asset volatility, systematic exposure, and market leverage – at daily frequency via a nonlinear state-space model. Institution-level distance-to-defaults are aggregated to produce a Financial Systemic Risk indicator, which captures correlations across asset cohorts, aligns with established systemic risk measures, and successfully tracks episodes of elevated financial stress, including the 2008 Global Financial Crisis, the COVID-19 pandemic, and the 2023 Silicon Valley Bank crisis.

The Safe-Tail Paradox: Testing AI Exposure of Banks' Borrowers

Authors : Pérignon Christophe (HEC Paris) ; Hurlin Christophe

Presenter : Christophe Pérignon (HEC Paris)

Discussant : Diane Pierret (University of Luxembourg)

We document a Safe-Tail Paradox in banks’ credit portfolios: retail borrowers classified as safest by scoring models are also the most exposed to artificial intelligence (AI)-related labor income risk. The paradox arises because AI exposure is positively correlated with borrower characteristics historically associated with low default risk (e.g., stable employment, high income), while AI exposure can weaken repayment capacity through displacement and wage compression. Credit risk therefore becomes concentrated in the safest segments of mortgage portfolios, precisely where regulatory capital buffers are thinnest. We design a borrower-level AI stress test and apply it to a synthetic portfolio calibrated to the French residential mortgage market. As AI adoption intensifies, capital requirements rise sixfold more in the safest class than in the riskiest, highlighting the need for AI-aware risk management.

Asset Pricing with Dynamic and Static Investors

Authors : Jappelli Ruggero (University of Warwick)

Presenter : Ruggero Jappelli (University of Warwick)

Discussant : Can Gao (University of St.Gallen)

Financial markets feature dynamic investors, who condition their asset allocation on news, and static investors, who allocate wealth across asset classes according to preset targets. This paper studies how their interaction determines stock prices. Because static investors consistently follow their asset allocation strategy, their wealth generates demand pressure on stocks, both in the present and in the future. Dynamic investors are unconstrained, yet short-selling yields no arbitrage profits, as stock prices are rationally expected to remain elevated by static investors' support. The equilibrium stock market valuation reflects static investors' wealth level, over and above wealth flows, dividends, and discount rates.

Portfolio Granularity and Demand Estimation

Authors : Cheng Ryan (INSEAD)

Presenter : Ryan Cheng (INSEAD)

Discussant : Lei ZHAO (ESCP Business School)

Previous applications of structural demand systems to asset pricing often imply puzzlingly inelastic, or even upward-sloping, demand curves. I show that these pathologies arise mechanically from the granular-portfolio condition: the softmax demand link weights each position’s contribution to identification by its squared portfolio share, so the effective information is governed by portfolio concentration (N_eff ≈ 30–60), not the raw number of holdings N. Standard practice aggregating heterogeneous mandates into a single observed portfolio therefore does not increase statistical power, but instead induces convexity. Linear specifications applied to this convex object distort price coefficients and overstate latent demand. A granular estimator yields well-behaved, downward-sloping demand curves without imposing sign restrictions; its implied aggregate price elasticities are two to four times larger than previous estimates.

The Estimation–Efficiency Frontier in Portfolio Complexity

Authors : Quaini Alberto (Erasmus University Rotterdam) ; Yuan Ming (Columbia University) ; Jiaqin Chen (Columbia University) ; Geng Deng (Wells Fargo)

Presenter : Alberto Quaini (Erasmus University Rotterdam)

Discussant : Ha Mao (Queen Mary University of London)

How many assets should a portfolio hold in large markets? We treat portfolio size as an endogenous choice in mean--variance allocation. Adding assets expands diversification, but also magnifies the cost of selecting holdings and learning weights from finite data. Active sets therefore balance marginal risk--return benefits against marginal estimation costs. Under factor structure, many securities are near-redundant claims on similar priced risks, so excluding assets can be inexpensive in population even without trading frictions. We formalize this tradeoff through an estimation--efficiency frontier that decomposes Sharpe-ratio losses into population spanning losses and finite-sample selection and allocation losses. The frontier implies diminishing returns to portfolio size and an interior optimum, yielding a scaling law for optimal cardinality in sample size, number of assets, and factor strength. The same frontier identifies an efficiency window in which sparse Markowitz plug-in portfolios are asymptotically efficient relative to the population mean--variance benchmark. Across managed portfolios, self-financing anomalies, and individual stocks, the estimation--efficiency tradeoff appears as hump-shaped out-of-sample Sharpe-ratio profiles in cardinality.

Beta Ambiguity and Asymmetric Mispricing

Authors : Jaeger Samuel (University of Bern)

Presenter : Samuel Jaeger (University of Bern)

Discussant : Simon Straumann (WHU- Otto Beisheim School Of Management)

After bad market news, the empirical Security Market Line (SML) is steep and closely aligned with the Capital Asset Pricing Model (CAPM); after good news, however, it slopes downward. This mispricing asymmetry is sharply at odds with canonical explanations for a flat SML. I show that beta ambiguity resolves the puzzle: ambiguity-averse investors act as if betas are inflated when news is bad and deflated when news is sufficiently good, generating the observed asymmetry. The mechanism further predicts that betting-against-beta (BAB) strategies crash after strongly negative news. A simple dynamic BAB strategy exploiting this prediction raises the Sharpe ratio by 0.48 on average across U.S. and international equity markets.

The Stock Market's Two Truths: Subjective Beliefs and Objective Reality

Authors : Cederburg Scott (University of Arizona) ; Anarkulova Aizhan (Emory University) ; Zhou Yi (Emory University)

Presenter : Scott Cederburg (University of Arizona)

Discussant : Samia Badidi (Tilburg University)

Investor beliefs determine stock prices, yet surveys provide incomplete measures of these expectations. We develop a return-based framework that infers the representative investor's subjective beliefs from the dynamics of objective cash-flow and discount-rate news components of market returns, with minimal reliance on surveys. We find investors substantially underreact to fundamental news, initially incorporating only 30% of an objective cash-flow shock. Our framework also identifies which features of a subjective belief model are necessary to fit the data. A belief model that focuses on underreaction but assumes constant subjective expected returns will fit poorly; volatile, acyclical subjective expected returns are necessary.

Underreaction in Publicly Traded Cross-Holdings

Authors : Savatier Marius (Dauphine-PSL)

Presenter : Marius Savatier (Dauphine-PSL)

I study publicly traded firms that hold a large stake in another publicly traded firm. In a frictionless market, the parent’s value should move one-for-one with the value of its stake. In the data, it moves only 38 cents on the dollar. This underreaction appears after isolating price movements specific to the subsidiary. The sample covers U.S. parent–subsidiary pairs between 1999 and 2024. When the parent holds no other assets, the estimated transmission rate is close to one. When the parent holds other assets, the transmission rate falls. The greater the uncertainty surrounding the parent’s other assets, the stronger the underreaction. This evidence is consistent with a limits-to-arbitrage mechanism in which non-fundamental demand shocks affecting the subsidiary price create a tendency toward underreaction, while uncertainty surrounding the parent’s non-hedgeable other assets limits arbitrageurs’ ability to trade against this force. I formalize this mechanism in a theoretical model.

Local Efficiency and Cross-Sectional Predictability: The Information Aggregation Wedge

Authors : Andrei Daniel (McGill University)

Presenter : Daniel Andrei (McGill University)

Local efficiency need not imply cross-sectional efficiency. I study economies where each firm is priced rationally under local information and public cross-sectional signals. Unless aggregation is perfect, dispersed learning about a common state leaves residual Bayesian filter errors: an information aggregation wedge. Observable characteristics cannot predict returns in a firm's time series, but by proxying for this wedge, they predict cross-sectional returns, neither as risk factors nor behavioral mistakes. This single wedge explains why anomalies have a strong factor structure, why firms migrate across value and growth portfolios, why value operates primarily within industries, why anomaly returns concentrate on news days, and why the Security Market Line appears flat.

Lendable Inventory Concentration, Short-Selling Risk, and Equity Pricing Anomalies

Authors : Yiming Pan (vienna graduate school of finance (vgsf))

Presenter : Pan Yiming (vienna graduate school of finance (vgsf))

Equity anomalies remain profitable net of borrowing fees, yet exploiting them requires short positions that are difficult to sustain when short-selling risk is high. This paper shows that a structural source of short-selling risk is the concentration of lendable inventory across institutional lenders. Using IHS Markit securities lending data, I show that concentrated lending sup- ply is associated not only with higher borrowing fees, but also with higher short-selling risk, measured by fee instability, utilization instability, and tail events in lending markets. Around earnings announcements, negative news is incorporated more slowly among high-IC stocks. Across a broad set of equity anomalies, high-concentration stocks earn larger long-short returns, driven primarily by the short leg. Cross-sectional regressions show that short-leg pre- dictability is strongest when short-selling risk is high and is not fully captured by loan fees. The evidence suggests that lendable inventory concentration is a structural source of short-selling risk and persistent mispricing.

Fiscal Imbalances and Asset Returns: Cross-Sector Fluctuations under the Aggregate Budget Constraint

Authors : Xu Yan (The University of Hong Kong) ; Gao Junxiong (Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University) ; Plazzi Alberto (Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University) ; Valkanov Ross (Valkanov: Rady School of Management, University of California San Diego)

Presenter : Yan Xu (The University of Hong Kong)

Discussant : Antoine Hubert de Fraisse (London School of Economics)

We express the aggregate budget constraint of the economy as nesting the budget constraints of the private, public, and external sectors (e.g., equities, Treasuries, and foreign assets). This formulation implies that valuation ratios in one sector may capture fluctuations in future real returns and cash-flow growth in other sectors. Exploiting the cross-sector restrictions implied by the aggregate constraint, we show that fluctuations in the government surplus-to-debt ratio robustly predict equity returns. The magnitude of this cross-sector predictability is on par with the own-sector predictability associated with the dividend–price ratio. We then develop a model in which distortionary taxes generate these time-series dynamics and use the cross-sector forecasts to calibrate the implied magnitude of the tax distortions.

Reading Inflation Tails

Authors : Renne Jean-Paul (HEC Lausanne) ; Nefussi-Guilloux Sophie (Banque de France) ; Magali Marx (Banque de France) ; Sarah Mouabbi (Banque de France)

Presenter : Jean-Paul Renne (HEC Lausanne)

We develop a framework to infer joint inflation-growth risks by combining survey density forecasts with inflation derivative prices. Survey histograms discipline marginal physical distributions of inflation and GDP growth, while inflation swaps, caps, and floors discipline the marginal nominal risk-neutral distribution of inflation. These marginal distributions leave the dependence between inflation and real activity only partially identified. Identification comes from the stochastic-discount-factor link between physical and risk-neutral distributions: since the market value of an inflation payoff depends on the real-activity state in which the inflation outcome occurs, differences between physical and risk-neutral inflation distributions are informative about joint outcomes for inflation and real activity. We implement this idea in a tractable Epstein-Zin model with a flexible joint distribution of inflation and real growth. Applied to the euro area, the framework uncovers substantial time variation in inflation-growth dependence and shows how this dependence shapes inflation risk premia and the pricing of inflation tails.

On the Macroeconomic Foundations of the Anomaly Zoo

Authors : O'Doherty Michael (University of Missouri) ; Wang Feifei (Miami University) ; Xuemin (Sterling) Yan (Miami University)

Presenter : Michael O'Doherty (University of Missouri)

Discussant : Tjeerd de Vries (HEC Paris)

We apply modern asset pricing methods to estimate risk premia for 192 candidate macroeconomic factors using a broad cross section of equity style portfolios. A dozen macroeconomic factors carry statistically significant risk premia under a framework that accounts for multiple testing. Models that include tradable mimicking portfolios for these factors frequently outperform leading multifactor models in explaining CAPM anomalies and fully account for the abnormal returns earned by factor momentum strategies. Our findings point to a link between economic fluctuations and asset prices, with the empirically strongest factors tied to housing starts and real personal consumption of services.

Heterogeneous Intermediaries in a Production Economy

Authors : Wieneke Leonie (University of Münster) ; Branger Nicole (University of Münster) ; Brock Patrick (University of Münster) ; Schlag Christian (Goethe University Frankfurt) ; Wieneke Leonie (University of Münster)

Presenter : Leonie Wieneke (University of Münster)

Discussant : Valere Fourel (European Central Bank)

We study a general equilibrium model in a continuous-time production economy with heterogeneous agents and Epstein–Zin preferences in which financial intermediaries face Value-at-Risk constraints. Intermediaries are less risk-averse and more productive than households. We find that restrictions on their portfolios significantly dampen investment, reduce aggregate productivity, and lower economic growth. Log-utility specifications—commonly used for tractability—severely understate these effects and may even suggest that restrictions are irrelevant. Extending the model to include heterogeneous intermediaries, we find that the main mechanisms remain intact: restrictions binding for the most productive intermediaries continue to depress growth, even if less productive intermediaries can partially absorb risk. Our results highlight the importance of preference specifications and intermediary heterogeneity for understanding the macroeconomic consequences of financial regulation and for asset pricing in production economies.

Investing for Children: How Beneficiary Identity Shapes Household Portfolios

Authors : Chebotarev Dmitry (Indiana University Bloomington) ; Filali Adib Fatima Zahra (Copenhagen Business School) ; Raja Akash (Copenhagen Business School)

Presenter : Dmitry Chebotarev (Indiana University Bloomington)

We study how beneficiary identity affects investment decisions. Using Danish administrative data linking parents and children, we compare how the same adult simultaneously manages their own account and their child’s account. Investments made for children are safer: child accounts take less systematic and idiosyncratic risk, rely more on mutual funds, and are less likely to hold lottery-like stocks. Despite being less profitable, child portfolios earn higher risk-adjusted returns and exhibit less pronounced behavioral biases. These differences cannot be fully explained by taxes, monitoring, or investment horizon. Instead, our findings point to purpose-specific investing within households.

Employee Forgivable Loans

Authors : Barbu Alexandru (INSEAD and Wharton) ; Wang Yiran (INSEAD)

Presenter : Alexandru Barbu (INSEAD and Wharton)

We study compensation in markets for expert advice. We document how a large class of client-facing professionals (lawyers, financial advisors, real estate agents) have employee forgivable loans — compensation advances structured as debt that employers can accelerate upon underperformance and separation. Analyzing millions of regulatory filings from the US securities industry, we illustrate how financial advisors routinely borrow 3-4 times their annual income, in ways that are entirely undisclosed to customers and credit bureaus, then spend the loan proceeds to lever up. Loans default, becoming the largest source of financial advisor delinquencies, and are conflicted, as advisors fund the resulting liquidity demands by defrauding their clients. Using a regression discontinuity design, we estimate that up to a third of all misconduct at large securities firms after the financial crisis is attributable to forgivable loans. We discuss reasons why firms may design compensation that incentivizes misconduct.

Gambling with Dividends

Authors : Klos Alexander (Kiel University) ; Reinhardt Niklas (Kiel University) ; Müller-Dethard Jan (Kiel University) ; Weber Martin (University of Mannheim)

Presenter : Alexander Klos (Kiel University)

In this paper, we document that retail investors have a tendency to gamble with dividends and we show that this behavior has asset pricing implications. First, using two independent brokerage datasets, we find that investors use disproportionate fractions of dividends to buy lottery stocks and options. Second, using stock market data, we show that marketwide dividends are associated with excess price pressure in lottery stocks. Third, using two experiments, we replicate the tendency to gamble with dividends in the lab and investigate mental accounting as the mechanism behind this tendency.

The Mechanical Disposition Effect

Authors : Ouyang Qinglin (Stockholm Business School, Stockholm University) ; Ouyang Shumiao (Saïd Business School, University of Oxford)

Presenter : Qinglin Ouyang (Stockholm Business School, Stockholm University)

The disposition effect is widely viewed as evidence that investors prefer realizing gains to losses. We show that much of this pattern is mechanical: stable trading styles, when combined with cost-basis accounting, can generate disposition-effect-like behavior even without realization motives. Using linked experimental and field data from Alipay and confirming the pattern in a traditional brokerage dataset, we find that the effect is up to nine times stronger for contrarian than momentum investors. This style is persistent across time and contexts, and so is the disposition effect. Although a zero-return discontinuity supports realization preference, this channel explains only about 10% of the overall effect. The disposition effect is therefore a noisy proxy for realization bias.

Taxing Executive Compensation for Social Missions

Authors : Li Xuelin (Columbia Business School)

Presenter : Xuelin Li (Columbia Business School)

Congress began taxing excessive executive compensation at tax-exempt organizations to discourage the diversion of resources from their social missions in 2017. I find that the policy instead increases executive compensation while reducing social benefit spending over time. In a dynamic agency model with moral hazard and social benefit provision, optimal contracts reward high earnings realizations by allocating a larger share of financial assets to CEO compensation, crowding out resources available for social benefit spending. Excise taxes erode financial assets. To deliver promised compensation, CEO claims must grow faster, further constraining social benefit provision. Empirically, using nonprofit hospitals as the setting, I find that affected organizations reduce charity care and community benefit expenditures while increasing CEO compensation following the tax introduction. Structural estimation shows that a 21% excise tax is equivalent to increasing the severity of the moral hazard friction by 2.2%, whereas interventions mitigating agency frictions enhance social value.

Remote Work and the Corporate Hierarchy

Authors : Vacca Matteo (Hanken School of Economics) ; Bajo Emanuele (University of Bologna) ; Pitkäjärvi Aleksi (University of Bologna)

Presenter : Matteo Vacca (Hanken School of Economics)

Using Finnish registry data including an administrative measure of work from home (WFH), we study how WFH allocation across the corporate hierarchy relates to wages and firm performance. Job-to-job transitions into WFH show that managers experience wage declines of approximately 3%, while middle- and lower-layer workers experience no comparable changes. Firm-level evidence shows that the performance consequences of WFH depend on its hierarchical location. Greater lower-layer WFH penetration is associated with weaker performance, whereas managerial WFH is not associated with worse firm performance. We interpret the decline as a conservative lower bound on managers’ valuation of WFH. Our results suggest that the value of WFH depends on where it is located inside the firm.

Ownership and Voting Authority: Institutional Investors and Proxy Voting

Authors : Brav Alon (Duke University) ; Li Tao (tao.li@warrington.ufl.edu)

Presenter : Alon Brav (Duke University)

Institutional ownership is widely used to assess corporate governance influence, yet voting rights are often delegated through adviser-client relationships. We study how reported institutional ownership translates into realized voting by institutions and construct a measure of voting utilization, defined as the fraction of reported ownership that is actually voted by the institution. Voting utilization varies substantially across institutions and firms and is strongly related to advisers' stated proxy voting arrangements. Reported holdings of the largest institutional blockholders overstate the voting control they actually exercise, implying that effective voting power is more diffuse than ownership shares alone would suggest. Overall, the evidence shows that the governance consequences of institutional ownership depend not only on who holds shares, but also on how voting authority is contractually allocated and exercised.

Stress testing an economic literature

Authors : Stanfield Jared (University of Oklahoma) ; Ragunathan Vanitha (University of Queensland) ; Tumarkin Robert (University of Queensland)

Presenter : Jared Stanfield (University of Oklahoma)

Researcher degrees of freedom in the evidence-generating process, together with publication incentives to report statistically significant findings, can generate substantial uncertainty and systematic skewness in the significance of reported coefficient estimates. To identify the mechanisms of and address these challenges, we utilize a new method for stress testing an economic literature via a novel declarative econometric language that combines techniques from replication and meta-study approaches. Applying this approach to the M&A literature, we find that within-literature variation in dependent variable (cumulative abnormal returns) and control variables (leverage and Tobin’s Q) definitions creates significant dispersion in the actual significance of the variables of interest. Reported/published results tend to be more significant than unreported alternatives. Taken together, our publicly available approach will allow researchers to succinctly demonstrate the robustness of individual papers and stress test economic literatures.

Term Sheets or Term Loans? How Valuations Shape Financing of Venture-Backed Firms

Authors : Tykvova Tereza (University of St.Gallen and Swiss Finance Institute ) ; Nguyen Hannah (Monash University ) ; Nguyen Giang (Monash University )

Presenter : Tereza Tykvova (University of St.Gallen and Swiss Finance Institute )

Discussant : Boris Vallee

Abstract This paper examines how valuation shapes the decision between debt and equity in firms backed by venture capital (VC). Building on market-timing theories from corporate finance, the analysis contrasts a “market-timing” hypothesis—higher valuations increase the like-lihood of equity rounds—with a “VC-demand” hypothesis—higher valuations increase the likelihood of debt rounds as VC investors prefer low entry prices. Using PitchBook data on roughly 130,000 financing rounds in more than 50,000 companies between 1996 and 2023, the paper finds that elevated valuations are associated with a higher propensity to obtain venture capital rather than venture debt, indicating that security choice timing is primarily driven by firms’ incentives even in entrepreneurial settings. The study further shows that this effect weakens with greater VC bargaining power and differs between insider and outsider equity rounds. The paper addresses endogeneity in valuations using an instrument based on mutual fund forced sales.

Predictability and Persistence in Deal Selection: Evidence from Venture Capital

Authors : Bissoto Luiz (EPFL)

Presenter : Luiz Bissoto (EPFL)

Discussant : Caroline Genc (MSU)

I study whether predictive technologies such as machine learning (ML) methods can improve deal selection in venture capital (VC) and whether investors can systematically translate predictive advantages into economic gains. Using a large panel of U.S. financing rounds, I show that portfolios constructed using ML signals derived exclusively from past and publicly available information to select out-of-sample deals outperform most investors in the U.S. VC market. I find that these gains are larger when models are trained to predict rare outcomes, such as IPOs and acquisitions, and when applied to early-stage deals. Overall, these ML-based portfolios tend to outperform a large share of investors—often those outside the top quartile in terms of success rates. Despite this potential incremental performance (“benefit”), I find that its persistence is weak within investors: once investor and time fixed effects are accounted for, benefit is strongly mean reverting, both in existence and magnitude. Exploiting a plausibly exogenous shock to the implementation cost of these technologies, I show that investors with higher benefit ex ante tend to have it quickly eroded post-shock, suggesting that the existence of exploitable predictive gains is structural rather than behavioral.

AI Regulation, Startup Financing and Talent Allocation

Authors : Mulla Junida (Said Business School, University of Oxford)

Presenter : Junida Mulla (Said Business School, University of Oxford)

Discussant : Don Bowen (Lehigh)

Governments are rapidly adopting artificial intelligence (AI) regulations to balance societal risks against potential productivity gains. Using a difference-in-differences design that exploits the staggered introduction of AI-related bills across 28 U.S. states, I find that proposed regulation reduces the annual probability that an AI startup secures funding and increases the likelihood of acquisition. The effects are concentrated in rules that restrict which AI systems can be built or deployed (“constraining” rules). By contrast, documentation, auditing, and disclosure requirements (“procedural” rules) dampen these effects, consistent with standardized disclosure reducing information frictions around opaque AI technologies. Hiring patterns show that constraining rules increase demand for AI governance roles and shift technical effort from frontier AI research toward deployment of existing systems, while procedural rules have the opposite effect. Startups also reallocate AI-related jobs to non-regulated states.

Organization capital, large startups, and the dearth of IPOs

Authors : Stulz Rene (The Ohio State University) ; Fahlenbrach Rüdiger (Swiss Finance Institute @ EPFL) ; Sanz Leandro (Swiss Finance Institute @ EPFL)

Presenter : Rene Stulz (The Ohio State University)

Discussant : Johan Hombert

Many startups in the 2000s have remained private after achieving large valuations, a pattern that funding availability alone cannot explain. We propose that startups relying heavily on organization capital to achieve economies of scale and network effects through digital technologies are more likely to become large private firms than exit earlier via an IPO or acquisition. Using LinkedIn data, we construct a novel measure of organization capital intensity for startups. Exploiting a legal shock that strengthened organization capital protection, we provide causal evidence that organization-capital-intensive startups are more likely to remain private and grow large rather than exit early.

Banking Without Branches

Authors : Becker Bo (Stockholm School of Economics) ; Amberg Niklas (Sveriges Riksbank)

Presenter : Bo Becker (Stockholm School of Economics)

Discussant : Jose M. Martin Flores (CUNEF)

Banks’ branch networks are contracting rapidly in many countries. We study the effects of these large-scale branch closures on firms’ access to credit and real economic activity. Our empirical setting is Sweden, where two thirds of all bank branches have closed in the past two decades. Using a shift-share instrument and micro data comprising the near-universe of Swedish firms and bank branches, we document that corporate lending declines substantially following branch closures, mainly via reduced lending to small, collateral-poor, and less productive firms. The reduced credit supply in turn causes contractions in the real activity of incumbent firms, as well as lower entry of new firms. The disappearance of bank branches thus has far-reaching implications for the economy.

Does Creditor Protection Matter for Corporate Borrowing? Evidence from the European Insolvency Regulation

Authors : Aretz Kevin (Alliance Manchester Business School) ; Marchica Maria (Alliance Manchester Business School)

Presenter : Kevin Aretz (Alliance Manchester Business School)

We exploit a natural experiment created by the 2002 European Insolvency Regulation (EIR) to identify the causal effect of creditor rights on corporate borrowing. The EIR unexpectedly reassigned the insolvency jurisdiction of fully-owned foreign subsidiaries within the European Union from their host country to the country in which their parents are headquartered, exposing otherwise similar firms operating in the same environment to different creditor rights regimes. Using double and triple-difference designs, we show that shifts toward stronger (weaker) creditor-rights regimes raise (lower) debt financing. Also, several dimensions of creditor protection matter. Linking UK subsidiaries to their house-banks, especially weaker banks cut their lending in response to weaker creditor rights.

Collateral Law and Enforcement Risk: Evidence from Native American Reservations

Authors : Leitzinger Leo (Goethe University Frankfurt)

Presenter : Leo Leitzinger (Goethe University Frankfurt)

Discussant : Federica Salvade (Paris School of Business)

I identify how collateral law and contract enforcement jointly shape credit supply and real economic activity using evidence from U.S. Native American reservations. I exploit (i) a 2001 Supreme Court ruling that increased the enforceability of commercial contracts in state courts and (ii) the staggered adoption of tribal secured transactions laws (STLs) from 1985 to 2016, which allow movable assets to be pledged as collateral. Using difference-in-differences designs, I find that the 2001 ruling increases small-business loan size by 10% where STLs had already been adopted, while STL adoption increases loan size by 11%, with no significant effect before 2001. Effects are stronger under uniform codes, centralized registries, and in ex ante wealthier reservations. STLs also increase income per capita and wages per worker, but not total employment. Instead, employment reallocates toward movable-asset-intensive sectors. The results provide micro evidence on the finance–growth link: complementarities between collateral law and enforcement shape how finance affects growth.

Who Wins and Who Loses In Prediction Markets? Evidence from Polymarket

Authors : Martineau Charles (university of toronto) ; Akey Pat (ESSEC) ; Gregoire Vincent (ESSEC) ; Harvie Nicolas (university of toronto)

Presenter : charles martineau (university of toronto)

Discussant : Michele Fabi (Crest-Ensae)

We study trading gains and losses on Polymarket, the largest prediction market. Using 588 million trades (\$67 billion in volume), we show that the gains are highly concentrated: the top 1\% of users capture 76.5\% of profits. Successful traders provide liquidity using limit orders that resolve favorably relative to realized outcomes while unsuccessful traders take liquidity using market orders. Monthly performance is weakly persistent, however, this may represent sample selection rather than skill. A detailed analysis of the trading behavior of the most successful accounts suggests that ``insider'' trading is unlikely to explain the performance of the largest winners.

Not Dead Yet: Options Trading Floors

Authors : Galati Luca (Ludwig Maximilian University of Munich) ; Galati Luca (Ludwig Maximilian University of Munich) ; Hendershott Terrence ; Khan Saad Ali ; Riordan Ryan

Presenter : Luca Galati (Ludwig Maximilian University of Munich)

Discussant : Antonia Kirilova (Cunef)

Over 20\ % of U.S. options volume trades on physical floors, almost exclusively in S&P~500 index options. We exploit the COVID-19 closure of the Cboe floor to identify the impact of floor trading. The floor attracts complex trades, particularly the riskiest trades. During the closure, Cboe activated electronic auctions to execute complex orders. When electronic auctions are withdrawn, the cost of complex trades more than doubles, while costs for simple trades are mostly unchanged. During the closure, the riskiest trades become much less prevalent. The floor facilitates the most difficult trades, but raises the cost of less difficult ones.

Market Power in the Securities Lending Market

Authors : Kaniel Ron (University of Rochester) ; Chen Shuaiyu ; Christian Opp

Presenter : Ron Kaniel (University of Rochester)

Discussant : Patrick Coen (Warwick)

We document market power in U.S. equity securities lending and examine its origins and consequences. We develop and estimate a dynamic model showing that the OTC custodian-intermediated structure, which prevails across the world’s largest financial markets, emerges as an equilibrium response to short sellers’ information leakage concerns. Despite paying non-competitive fees that raise asset owners' valuations by up to 100\%, short sellers prefer this prevailing intermediated structure over a centralized alternative, particularly for smaller stocks. This is because securities lending is not a standard product market: the demand side prefers opacity. Our results inform market design and transparency regulation.

The US Treasury’s Biggest Short: Duration in the Shadows

Authors : Georgievska Ljubica (NYU Stern and BI Norwegian Business School) ; Georgievska Ljubica (NYU Stern and BI Norwegian Business School) ; Pegoraro Stefano (NYU Stern and BI Norwegian Business School) ; Saunders Anthony

Presenter : Ljubica Georgievska (NYU Stern and BI Norwegian Business School)

We show the U.S. Treasury prioritizes nominal over market value of debt, at cost to taxpayers. The Treasury absorbs fiscal shocks through bills while maintaining predictable longer-term issuance, and does not adjust duration supply in response to market signals, instead tilting toward maturities with the highest intermediation mar- gins. The 2024–2025 buyback program targeted below-par bonds, freeing $21 billion in nominal fiscal capacity with no market-value gain for taxpayers. Exploiting staggered ESA 2010 adoption, we find core European countries reduced term spreads by 0.28 to 0.37 percentage points by managing duration risk.

Giving Life to Private (Rated) Credit

Authors : Li Ziang (Imperial College London) ; Gschossmann Isabella (Imperial College London) ; Uppal Ali (Imperial College London) ; Wenning Derek (Indiana University, Kelley School of Business School)

Presenter : Ziang Li (Imperial College London)

We study how ratings inflation can undermine financial regulation and inadvertently fuel the growth of privately rated credit. We exploit the 2021 Risk-Based Capital reform for U.S. life insurers, which aimed to curb reaching-for-yield through its treatment of credit ratings. Following the reform, more exposed insurers—especially those with tighter capital constraints—shifted toward privately rated bonds. These bonds exhibit within-issuer ratings inflation and offer higher yields within rating categories, consistent with greater underlying risk behind similar regulatory labels. Accounting for this inflation substantially attenuates the reform’s apparent improvement in portfolio risk. Despite targeting ratings rather than market structure, the reform indirectly increased demand for private bonds. Consistent with this demand shift, firms more connected to exposed life insurers increased their private debt issuance.

When Long Run Trends Are Unknown: Bond Pricing Implications

Authors : Roussellet Guillaume (New York Fed/McGill University) ; Ahonon Borel (McGill University)

Presenter : Guillaume Roussellet (New York Fed/McGill University)

This paper assesses the informativeness of the Treasury yield curve about the longrun real interest rate, r-star, when bond investors are uncertain about its value. We propose a macro-finance model where inflation, growth, and the monetary policy rate are driven by a combination of persistent trends and transitory cycles. Investors only observe the aggregate macroeconomic variables but infers trends and cycles to price bonds. In spite of imperfect information, our model preserves the simplicity of standard affine term structure models. Our estimation reveals wide investors uncertainty about r-star that does not disappear over time, and an increasing r-star trend before the Volcker era, largely contrasting with perfect information estimates. Because investors confuse trends with cycles, the yield curve can under or overreact to structural monetary policy shocks.

The partisan gap in homeownership costs: Evidence from property taxes

Authors : Kalda Ankit (Indiana University) ; Soni Vikas (University of South Florida) ; Wu Qianfan (University of South Florida)

Presenter : Ankit Kalda (Indiana University)

Discussant : Anastasia Girshina (Stockholm School of Economics)

Property taxes are among the largest recurring costs of U.S. homeownership. Using property transaction data matched with voter registration records across 49 states, we document a partisan gap in this cost: political minorities—Republicans in Democratic-majority counties and Democrats in Republican-majority counties—face higher assessment-to-sale ratios than the political majority within the same tax jurisdiction. This gap is driven by across-neighborhood variation in Democratic counties and by both across- and within-neighborhood variation in Republican counties. Using novel hand-collected data on assessors, we show that gaps shrink when assessors share the minority group's affiliation and widen when assessors are likely to have more information or face weaker constraints.

From Bricks to Blocks: Tokenization and the Financialization of Real Estate

Authors : Shin Donghwa (UNC Kenan-Flagler Business School) ; Augustin Patrick (McGill University) ; Yihang Chen (McGill University) ; Franklin Qian (UNC Kenan-Flagler Business School)

Presenter : Donghwa Shin (UNC Kenan-Flagler Business School)

Discussant : Cristian Badarinza (Frankfurt School of Finance and Management)

Tokenization converts real estate into tradable blockchain tokens and promises broader access, continuous trading, and improved liquidity for an otherwise illiquid asset class. We test these claims using a property-level panel of 644 U.S. residential properties, linking on-chain prices, rents, and trades to traditional housing records. Despite frequent trading, token prices add little information and follow, rather than lead, housing fundamentals. Liquidity improves only modestly, and higher returns reflect elevated rental yields and platform design rather than superior performance. Secondary markets exhibit poor market quality, and DeFi collateralization appears to aggravate these frictions. Dispersed ownership also weakens monitoring, introduces intermediary risk, and generates negative neighborhood spillovers. Suggestive evidence from governance-token ownership indicates that governance rights may partially mitigate these monitoring frictions. Overall, tokenization changes the packaging and accessibility of real estate claims more than their underlying economics: market design and governance, not blockchain technology alone, can determine information, liquidity, and real outcomes.

Immigration and Homeownership

Authors : Kabir Poorya (NUS) ; Ruan Tianyue (NUS)

Presenter : Poorya Kabir (NUS)

Discussant : Claes Bäckmann (Leibniz Institute SAFE)

We study the effect of immigration on homeownership, a key pathway for household wealth accumulation. Using a shift-share approach to isolate plausibly exogenous variation in immigrant inflows across US counties, we document that immi- grant inflows lead to lower homeownership among US-born households. The decline in homeownership is stronger in areas with inelastic housing supply and areas where immigrants are more likely to be home buyers. Immigrant inflows raise house-price-to-income ratios, suggesting the key role of declining affordability. The decline is more pronounced among the young, white, and single men. A difference-in-differences analysis exploiting the Venezuelan exodus in 2014 as an independent source of variation in immigration corroborates these findings. Overall, immigration-induced housing demand can create financial barriers to homeownership.

Corporate Dark Money in Politics: Evidence from India

Authors : Vallée Boris (INSEAD) ; Puri Sukrit (London Business School)

Presenter : Boris Vallée (INSEAD)

This paper examines corporate dark money in politics using a novel regulatory episode in India. From 2018 onward, firms could make confidential, unlimited donations to political parties via ``electoral bonds.'' A 2024 Supreme Court ruling banned the practice and retroactively disclosed all $2 billion of such donations. Linking these data to a newly assembled dataset of publicly disclosed contributions going back to 2003, we establish that confidential donations differ markedly from disclosed ones: they are far larger in aggregate, attract bigger and more sophisticated firms, and frequently link donor firms to multiple political parties--a pattern absent from disclosed giving. When confidentiality is unexpectedly removed, publicly listed donor firms experience significant negative abnormal returns, implying an estimated $12 billion in value destruction--over five times total funds raised through electoral bonds. These patterns are consistent with dark money fostering political hedging while minimizing the risk of political retribution for donor firms. Three further findings support this interpretation: Firms hedge more broadly across parties and especially around closely contested elections when donating confidentially; sophisticated firms disproportionately shift from disclosed to confidential channels; and the market penalty upon disclosure falls hardest on firms with opposition-party ties. Paradoxically, the creation of a hidden donation channel may foster political plurality by lowering the cost of donating to opposition parties.

Incident-Driven ESG Engagement

Authors : Sun Yongheng (Singapore Management University) ; Liang Hao (Singapore Management University) ; Tham Mandy (Singapore Management University)

Presenter : Yongheng Sun (Singapore Management University)

Using proprietary engagement records from a large European asset management company, we study how ESG shocks shape institutional monitoring. We find that salient negative incidents are a powerful trigger for engagement, as they deteriorate public sentiment, heighten investors’ reputational concerns, and reveal new information about previously hidden ESG weaknesses. Investors respond not only to incidents involving focal firms but also to incidents at peer firms, consistent with both reactive monitoring of revealed ESG risks and preemptive monitoring based on shared risk signals within the competitive environment. Incident-driven engagement is more informed and consequential: it mitigates subsequent sentiment deterioration, reduces future ESG incidents, attenuates declines in institutional ownership, and contributes to higher firm value. Finally, more intensive engagement is significantly more likely to succeed. Overall, our research speaks to the fundamental question of how engagement is initiated and underscores its role as an effective channel of external corporate governance.

Regulating Activist Short-Termism: When Moral Hazard Meets Adverse Selection

Authors : Corum Adrian Aycan (Cornell University - Johnson Graduate School of Management) ; Nurisso George (University of Florida)

Presenter : Adrian Aycan Corum (Cornell University - Johnson Graduate School of Management)

We study a model of activist short-termism, where the activist can sell his stake in the target before the impact of his intervention is realized. Lower liquidity or policies that make activists' exit harder can increase firm value if there is only moral hazard (where the activist's intervention creates more value if he exerts effort) or only adverse selection (where some interventions destroy value while others create value). However, these changes destroy total firm value when both moral hazard and adverse selection are binding. Policies that reward long-termism can also destroy total firm value, but with a lower likelihood. The model implies the optimality of value destruction by other types of blockholders as well, such as venture capitalists and entrepreneurs.

Private Equity and the Organization of Firms

Authors : Yin Xiang (Tsinghua University) ; Obernberger Stefan (Erasmus University Rotterdam, Erasmus School of Economics) ; Weik Stefan (Erasmus University Rotterdam, Erasmus School of Economics)

Presenter : Xiang Yin (Tsinghua University)

We study how private equity (PE) buyouts reshape the internal organization of ffrms. Using data on over 10,000 U.S. PE buyouts combined with resume information of more than ffve million employees, we track changes in hierarchies, managerial control spans, and functional structure. Contrary to a widely cited view that PE streamlines and ffattens organizations, we ffnd that hi-erarchies become deeper after buyouts and managerial control spans shrink. PE-owned ffrms re-allocate employment from product-related functions toward administrative and operative roles, while management expands into more specialized functions. These organizational changes hold across deal types and outcomes and persist after PE exits. Overall, our evidence suggests that PE buyouts create value by strengthening ffrms’ organizational capabilities-enhancing how tasks and decision-making are structured and coordinated within the ffrm-rather than concentrating decision-making in ffatter hierarchies.

FX Neglect in Private Equity Buyouts

Authors : Tang Wang (University of St.Gallen) ; Pursiainen Vesa (University of St. Gallen, Swiss Finance Institute) ; Riddiough Steven (University of St. Gallen, Swiss Finance Institute)

Presenter : Wang Tang (University of St.Gallen)

Our evidence suggests that international private equity (PE) funds misallocate capital by failing to account for predictable foreign exchange (FX) movements. Ex-ante observable forward FX rates predict realized FX changes and fund-level investment returns. Furthermore, PE funds are more likely to make acquisitions when forward FX rates imply the target currency will depreciate. The effects become weaker for PE funds dealing more in foreign currencies and that previously experienced FX losses. They disappear in placebo tests in which domestic-only PE funds are assigned an expected FX return. Similar results are obtained using real exchange rates to capture expected FX movements.

Lucky Beta: The Timing Wedge and Capital Misallocation in Private Equity

Authors : Lützenkirchen Mats (ESCP Business School) ; Buchner Axel (ESCP Business School)

Presenter : Mats Lützenkirchen (ESCP Business School)

The Public Market Equivalent (PME) is the dominant benchmark for private equity performance. We show that standard PME embeds a flawed asset-pricing assumption by valuing private cash flows as if they have unit exposure (beta = 1) to public equities. Recasting PME in a stochastic discount factor framework, we show that the resulting distortion is driven by the interaction of excess market risk and cash-flow timing. Using a generalized estimator, we find implied market exposure exceeds 1 for both buyout and venture capital. Because managers distribute capital during market booms, PME understates risk and attributes market exposure to alpha. Consequently, 26% of buyout funds and 11% of venture funds change performance quartiles, potentially misleading institutional investors.