2016 Robert Day School of Economics and Finance Publications and Grants

Antecol, Heather, Ozkan Eren, and Serkan Ozbeklik. "Peer Effects in Disadvantaged Primary Schools Evidence from a Randomized Experiment." Journal of Human Resources 51.1, 2016, 95-132.

Abstract: Using data from a well-executed randomized experiment, we find that the average classroom peer achievement adversely influences own student achievement in math and reading in primary schools in disadvantaged neighborhoods. In addition, using a unique feature of our data, we provide tentative evidence that our focus on students in primary schools in disadvantaged neighborhoods may potentially be the driving force behind the divergence in our results and the results in the existing literature. Finally, we show that these different peer dynamics in disadvantaged neighborhoods can potentially be explained by the frame of reference and the invidious comparison models.

Batta, George, Jiaping Qiu, and Fan Yu. “Credit Derivatives and Analyst Behavior,” Accounting Review 91(5), 2016, 1315-1343.

Abstract: This paper presents a comprehensive analysis of the role of credit default swaps (CDS) in information production surrounding earnings announcements. First, we demonstrate that the strength of CDS price discovery prior to earnings announcements is related to the presence of private information and the illiquidity of the underlying corporate bonds, consistent with the CDS market being a preferred venue for informed trading. Next, we ask how the information revealed through CDS trading influences the output of equity and credit rating analysts. We find that post-CDS trading, the dispersion and error of earnings-per-share forecasts are generally reduced, and downgrades by both types of analysts become more frequent and more timely before large negative earnings surprises, suggesting that the CDS market conveys information valuable to financial analysts.

Bird, Graham, “Fiscal Policy and the Global Crisis,” World Economics, Vol 17, No 1, 2016, 147-176.

Abstract: Up until the global economic crisis at the end of the 2000s an eclectic approach to fiscal policy seemed to have emerged from the long-standing debates that there had been about it. This largely ruled out using fiscal policy to fine tune the economy. Instead macro policy in advanced economies focused on monetary policy within a framework of inflation targeting. In the depths of the recession, however, and with interest rates approaching a zero lower bound, fiscal policy was dramatically resurrected and a broad global consensus formed around fiscal stimulus. The consensus did not last long and sharp disagreements soon re-emerged, in particular with respect to the speed and nature of fiscal consolidation. Why did these changes in the approach to fiscal policy happen and were they appropriate? Does the available empirical evidence allow us to form conclusions about the impact of fiscal policy or is it still a matter of ‘on the one hand…but on the other’? And how might fiscal policy evolve in the light of recent experience? This article examines these questions.

Bird, Graham, “Now You See Them, Now You Don’t: The Case of the Shrinking Global Economic Imbalances,” World Economics, Vol. 17, No. 4, 2016.

Abstract: Global economic imbalances in the mid-2000s reached a level that many commentators viewed as unsustainable. The claim was frequently made that the imbalances contributed significantly to causing the world-wide financial and economic crisis at the end of the decade. Since the mid-2000s the imbalances have shrunk considerably, and their pattern has also changed. This article uses conventional balance of payments theories to examine what may have been happening. It draws on empirical evidence to assess which theories receive the strongest support from the available data. It emerges that most of the adjustment has been brought about by reductions in expenditure in deficit countries. With some notable exceptions, expenditure switching by means of changes in real effective exchange rates has generally made only an extremely modest contribution. The article goes on to contemplate the future evolution of imbalances. The experience with global economic imbalances since the world economic crisis raises many fundamental issues about the future design of the international monetary system. These include the type of adjustment and financing mechanisms embodied in it, as well as the nature of international macroeconomic policy co-ordination.

Bird, Graham, “Towards a Better Understanding of International Capital Volatility,” World Economics, Vol. 17, No. 3, 2016, 1-24.

Abstract: Understanding why capital moves internationally in the way that it does has become increasingly important as capital accounts have been liberalized and as the size of international capital movements has expanded dramatically. International capital movements exert potentially significant effects on many key macroeconomic variables. The pattern of capital mobility reveals considerable volatility; surges, sudden stops and reversals are common features of the contemporary landscape of financial globalization. This article draws on both economic and behavioral approaches in an attempt to offer a reasonably complete analysis of capital movements and volatility. It also relates the ideas introduced to some specific episodes where international capital volatility has been observed. A better understanding of capital volatility involves recognizing that there is no simple and universally applicable explanation that fits all types of capital in all cases.

Bird, Graham and Edward Elgar. The International Monetary Fund: Distinguishing Reality from Rhetoric. Edward Elgar Publishing, 2016.

Abstract: There is no shortage of opinion about the International Monetary Fund (IMF). Some see it as the agent of austerity, being manipulated by wealthy nations and forcing poorer countries to pursue economic policies that suppress growth and development. A sharply contrasting view regards it as bailing out such countries with large amounts of soft finance, allowing them to avoid necessary adjustment. The challenge is to evaluate the alternative arguments and to distinguish reality from rhetoric. In this book, the authors undertake a careful and detailed empirical analysis of the underlying issues, covering participation in IMF programs, their implementation and effects on economic growth, and on the willingness of international capital markets to lend. Blending research methodologies and crossing conventional disciplinary boundaries, what emerges is a balanced and nuanced assessment of the IMF’s operations that confronts many commonly held views. Unique in its broad scope, this careful examination of the IMF will be of great interest to students and academics in the fields of international economics and international relations. Those involved in international financial institutions and national monetary institutions will also find it to be an impartial and illuminating study.

Bjerk, David. “In Front of and Behind the Veil of Ignorance: An Analysis of Motivations for Redistribution.” Social Choice and Welfare 47(4), 2016, 791-824.

Burdekin, Richard C.K., and Leroy O. Laney. "Fiscal Policymaking and the Central Bank Institutional Constraint Una Vez Más: New Latin American Evidence." Public Choice, Vol. 167, Nos. 3-4, 2016, 277-289.

Abstract: Evidence on the degree to which central bank independence can constrain government budget deficits remains surprisingly scarce.  This paper finds empirical support for the importance of the central institutional constraint for a 14-country sample of Latin American countries over 1990-2012.  These results suggest that greater central bank autonomy has indeed helped reign in fiscal excesses in a region that has been plagued by inflationary deficit expansion for much of the post-war period.  The ability to potentially discipline government policy adds to an independent central bank’s inherent role in adding to the checks and balances essential to a well-functioning democracy.

Evans, Mary F. “The Clean Air Act Watch List: An Enforcement and Compliance Natural Experiment.” Journal of the Association of Environmental and Resource Economists 3(3), 2016, 627-665.

Abstract: I exploit a natural experiment created by the U.S. Environmental Protection Agency’s (EPA) Clean Air Act watch list. The watch list was designed as a monthly tracking system for internal use at EPA but its existence and the identities of facilities on some watch lists were publicly revealed beginning in late 2011. Variation created by the watch list and its public release allow me to identify the compliance impact of listing on the watch list and the compliance impact of the public release of the watch list. Results suggest the average violation probability fell between 10 and 15 percentage points as a result of initial listing on the watch list and between 15 and 23 percentage points as a result of the public release of the watch list. The paper’'s findings inform the discussion regarding the effectiveness of traditional and information-based enforcement tools.

Evans, Mary F., Eric Helland, Jonathan Klick, and Ashwin Patel. “The Developmental Effect of State Alcohol Prohibitions at the Turn of the 20th Century.” Economic Inquiry 54(2), 2016, 762-777.

Abstract: We examine the quasi-randomization of alcohol consumption created by state-level alcohol prohibition laws passed in the U.S. in the early part of the 20th century.  Using a large dataset of World War II enlistees, we exploit the differential timing of these laws to examine their effects on adult educational attainment, obesity, and height.  We find statistically significant effects for education and obesity that do not appear to be the result of pre-existing trends.  Our findings add to the growing body of economic studies that examines the long-run impacts of in utero and childhood environmental conditions.

Fernholz, Ricardo T. "A model of economic mobility and the distribution of wealth." Journal of Macroeconomics, 50, 2016, 168-192.

Abstract: This paper introduces new techniques to obtain a closed-form rank-by-rank characterization of the equilibrium distribution of wealth in a model in which finitely lived households face uninsurable idiosyncratic investment risk. A central result is that the extent of inequality is determined entirely by two factors. The first factor, household exposure to idiosyncratic investment risk, increases inequality. The second factor, cross-sectional mean reversion of household wealth, decreases inequality. We show that economic mobility is decreasing in inequality and increasing in mean reversion, a result that is consistent with recent empirical observations about the geographic variation in mobility that exists both domestically and internationally. Our approach allows us to examine the implications of increased market completeness in the form of a risk-sharing subgroup of households. We show that a risk-sharing subgroup rises or falls in the equilibrium wealth distribution depending on the level of inequality, and that its presence raises welfare and the rate of wealth accumulation for all households in the economy.

Filson, Darren and Marc Weidenmier, “The Impact of Eisenhower Medical Center on the Coachella Valley Economy.” Prepared for the Lowe Institute of Political Economy and Eisenhower Medical Center, 2016.

Abstract: This report provides estimates of Eisenhower Medical Center (EMC)’s total annual impacts on output (revenues), economic activity (value added), employment and employee earnings in the Coachella Valley, as well as a projection of the likely impacts of construction activities associated with a planned $150M investment in a new surgical center.  The report also compares EMC’s annual impacts to those of the Valley’s retail, hotel and motel, and restaurant industries. EMC increases output in the Coachella Valley by $866M per year, and it creates 5,228 jobs and employee earnings of $359M. The total impacts are important within the Valley economy: EMC’s total impacts account for 2.9% of the Valley’s economic activity, 2.4% of its jobs, and 2.3% of its personal income. Removing EMC from the Valley’s economy would be more harmful to economic activity than the expected impacts of randomly removing 1 out of every 5 retail stores, or 90% of the Valley’s hotels and motels (including casino hotels), or half of the area’s restaurants. With respect to the planned $150M investment in a new surgical center, the total local impacts on output, employment and earnings associated with the construction activities are projected to be $125M, 798 jobs and $36M. These estimates pertain only to the process of constructing and outfitting the new center; they are separate from the impacts of EMC’s current operations and also do not include the impact that the new center will have on the surrounding economy once it is up and running. Thus, if construction of the new center could be completed within a single year, then during that year, the total economic impact of EMC (summing the impacts of the ongoing operations and the construction activities) on output, employment and earnings in the Coachella Valley would be $991M, 6,026 jobs and $395M respectively.

Filson, Darren, “March Air Reserve Base Economic Impact Analysis.” Prepared for the Rose Institute of State and Local Government and the Riverside County Economic Development Agency, 2016.

Finley, A. R. and J. Stekelberg. “The Economic Consequence of Tax Service Provider Sanctions: Evidence from KPMG’s Deferred Prosecution Agreement.” Journal of American Taxation Association 38 (1), 2016, 57-78.

Abstract: This study investigates the effect of KPMG’s Deferred Prosecution Agreement (DPA) on the accounting firm’s ability to sell auditor-provided tax services (APTS) and its clients’ tax avoidance. We document that following the DPA, clients were more likely to discontinue or reduce purchasing APTS from KPMG relative to the other Big Four accounting firms. However, we do not find any evidence of a change in tax avoidance among KPMG clients continuing to purchase APTS following the DPA relative to other Big Four clients. Broadly, our findings highlight how elevated reporting standards and external monitoring impose significant negative economic consequences on the service providers subject to these sanctions. At the same time, it appears clients do not suffer any observable tax costs by continuing to engage a sanctioned tax service provider.

Evans, Mary F., Eric Helland, Jonathan Klick, and Ashwin Patel. “The Impact of Fetal Alcohol Exposure: Evidence from the End of Prohibition,” Economic Inquiry 54(2), 2016, 762-777.

Abstract: We examine the quasi-randomization of alcohol consumption created by state-level alcohol prohibition laws passed in the United States in the early part of the twentieth century. Using a large dataset of World War II enlistees, we exploit the differential timing of these laws to examine their effects on adult educational attainment, obesity, and height. We find statistically significant effects for education and obesity that do not appear to be the result of pre-existing trends. Our findings add to the growing body of economic studies that examine the long-run impacts of in utero and childhood environmental conditions

Helland, Eric. “Of Instrumental Variables and Institutions.” Journal of Institutional and Theoretical Economics (JITE), vol. 172, issue 1, 2016, pages 65-69.

Frame, David, Eric Hughson, and J. Chris Leach. "Why Expertise Is Important for the Detection of Abnormal Performance: The Hot Hand Strikes Back." Journal of Accounting, Auditing & Finance, 2016.

Abstract: The Sarbanes–Oxley Act emphasizes auditor and analyst independence as defining characteristics of quality financial reporting. We argue that this focus on independence may have adverse effects on auditor expertise. In particular, an independent auditor will lack firsthand knowledge regarding the construction of a client’s financial statements, knowledge that is obtained through the provision of a variety of non-audit services. This lack of firm-specific expertise introduces the potential for a bias analogous to that alleged in sports fans’ belief in the ‘‘hot hand’’ in athletic performance. In studies of professional sports, little evidence of serially abnormal performance has been documented by empirical researchers. As a result, many assert the absence of a hot hand in sports and conclude that athletic spectators’ beliefs and assertions thereof are not rational. We demonstrate that commonly used tests lack power specifically in the detection of abnormally elevated streaks in performance, even for large sample sizes. Importantly, in contrast to the usual non-structural (and non-parametric) approach, incorporating a structural-data-generating process dramatically enhances an observer’s ability to make the correct inference concerning the existence of a hot hand even if only a few observations are available. Of relevance to the debate regarding the (dis)advantages of independent auditors, we argue that auditor expertise regarding the underlying structure of the data-generating processes is paramount in increasing statistical power in (a) an auditor’s detection of anomalous corporate behavior and (b) inquiries by the Public Company Accounting Oversight Board (PCAOB) regarding auditor inference and potential corruption.

Antecol, Heather, Ozkan Eren, and Serkan Ozbeklik. "Peer Effects in Disadvantaged Primary Schools Evidence from a Randomized Experiment." Journal of Human Resources 51.1, 2016, 95-132.

Abstract: Using data from a well-executed randomized experiment, we find that the average classroom peer achievement adversely influences own student achievement in math and reading in primary schools in disadvantaged neighborhoods. In addition, using a unique feature of our data, we provide tentative evidence that our focus on students in primary schools in disadvantaged neighborhoods may potentially be the driving force behind the divergence in our results and the results in the existing literature. Finally, we show that these different peer dynamics in disadvantaged neighborhoods can potentially be explained by the frame of reference and the invidious comparison models.

Eren, Ozkan and Serkan Ozbeklik. "What Do Right‐to‐Work Laws Do? Evidence from a Synthetic Control Method Analysis." Journal of Policy Analysis and Management 35.1, 2016, 173-194.

Abstract: Using the case study of Oklahoma and a recently developed econometric technique, we examine the impact of right-to-work (RTW) laws on state-level labor market outcomes. Our results show that the passage of RTW laws in Oklahoma decreased private sector unionization rates. Several other state outcomes including total employment rate and private sector average wages, on the other hand, were not affected by RTW laws. The findings for the private sector generally carry over to the manufacturing sector.

Erenburg, Grigori, Janet Kiholm Smith, and Richard Smith, “Which Institutional Investors Matter for Firm Survival and Performance?” North American Journal of Economics and Finance, 37, 2016, 348-373.

Abstract: Using data that spans three decades, we assess the diverse roles of institutional investors in impacting survival and performance of chronically underperforming firms and contrast the results for consistently overperforming firms. We find material differences in institutional investor roles between these two samples.   Differentiating among institutional types, using common evaluation criteria, and controlling for prior performance and attrition bias provides insights unattainable by examining aggregated holdings or holdings of a single type.  For underperformers, results are negative for activist pension funds and long-term institutions, positive for activist hedge funds and short-term institutions, and mixed for institutional blockholders.  Differences between independent and gray institutions are not material.

Kutsuna, K., J.K. Smith, R. Smith, and K. Yamada, "Supply-chain spillover effects of IPOs." Journal of Banking & Finance 64, 2016, 150-168.

Abstract: We use the IPOs of supply-chain partners as precipitating events and test for positive spillovers on private firms (the IPO spillover hypothesis”). A trading partner’s IPO may benefit its suppliers through increased demand and its customers by reducing an input-related growth constraint. A newly public firm may also transmit additional liquidity to trading partners through trade credit practices. Using Japanese data on important relationships between IPO firms and their private suppliers and customers, we find that suppliers and customers experience significantly higher rates of growth in revenue, cash balances, and PP&E than do other private firms. The paper appears to be the first to document real and financial effects of positive liquidity shocks on supply-chain partners.

Smith, Janet Kiholm, and Richard L. Smith. "Socially Responsible Investing by Universities and Colleges." Financial Management Vol. 45, Issue 4, 2016, 877-922.

Abstract: We analyze the socially responsible investing (SRI) practices of universities and colleges. Although SRI may align with an institution’s mission and enhance its “brand,” these activities may also arise from agency problems. We find evidence of both effects. Consistent with branding effects, we find significant differences between independent and church-affiliated schools, we find that highly selective and elite schools do not seek differentiation through SRI and are unlikely to sacrifice returns for SRI, and we find that less selective schools appear to regard costs of SRI as branding investments. Consistent with agency problems, attributes of investment committees bear on policy choices. For independent schools, larger committees and those where professional representation is low are likely to screen, allow sustainability considerations to influence investment choices, and vote proxies along SRI lines. “Social boards,” those with more alumni and less investments expertise, appear more oriented toward generating donations and less focused on investment policy. 

Vossmeyer, A. "Sample Selection and Treatment Effect Estimation of Lender of Last Resort Policies," Journal of Business and Economic Statistics, 34, 2016, 197-212.

Abstract: This article develops a framework for estimating multivariate treatment effect models in the presence of sample selection. The methodology deals with several important issues prevalent in policy and program evaluation, including application and approval stages, nonrandom treatment assignment, endogeneity, and discrete outcomes. This article presents a computationally efficient estimation algorithm and techniques for model comparison and treatment effects. The framework is applied to evaluate the effectiveness of bank recapitalization programs and their ability to resuscitate the financial system. The analysis of lender of last resort (LOLR) policies is not only complicated due to econometric challenges, but also because regulator data are not easily obtainable. Motivated by these difficulties, this article constructs a novel bank-level dataset and employs the new methodology to jointly model a bank’s decision to apply for assistance, the LOLR’s decision to approve or decline the assistance, and the bank’s performance following the disbursements. The article offers practical estimation tools to unveil new answers to important regulatory and policy questions.

Filson, Darren and Marc Weidenmier, “The Impact of Eisenhower Medical Center on the Coachella Valley Economy.” Prepared for the Lowe Institute of Political Economy and Eisenhower Medical Center, 2016.

Abstract: This report provides estimates of Eisenhower Medical Center (EMC)’s total annual impacts on output (revenues), economic activity (value added), employment and employee earnings in the Coachella Valley, as well as a projection of the likely impacts of construction activities associated with a planned $150M investment in a new surgical center.  The report also compares EMC’s annual impacts to those of the Valley’s retail, hotel and motel, and restaurant industries. EMC increases output in the Coachella Valley by $866M per year, and it creates 5,228 jobs and employee earnings of $359M. The total impacts are important within the Valley economy: EMC’s total impacts account for 2.9% of the Valley’s economic activity, 2.4% of its jobs, and 2.3% of its personal income. Removing EMC from the Valley’s economy would be more harmful to economic activity than the expected impacts of randomly removing 1 out of every 5 retail stores, or 90% of the Valley’s hotels and motels (including casino hotels), or half of the area’s restaurants. With respect to the planned $150M investment in a new surgical center, the total local impacts on output, employment and earnings associated with the construction activities are projected to be $125M, 798 jobs and $36M. These estimates pertain only to the process of constructing and outfitting the new center; they are separate from the impacts of EMC’s current operations and also do not include the impact that the new center will have on the surrounding economy once it is up and running. Thus, if construction of the new center could be completed within a single year, then during that year, the total economic impact of EMC (summing the impacts of the ongoing operations and the construction activities) on output, employment and earnings in the Coachella Valley would be $991M, 6,026 jobs and $395M respectively.

Amri, Puspa D., Greg M. Richey, and Thomas D. Willett. "Capital Surges and Credit Booms: How Tight is the Relationship?." Open Economies Review 27.4, 2016, 637-670.

Abstract: It has been frequently argued that surges in capital inflows are a major cause of credit booms and banking crises in emerging market economies. This view suggests that there is little role that can be played by domestic policy to break this linkage. This need not be the case. We show that the linkage between surges and booms is not as strong as is often assumed. One problem with most previous studies is that a wide range of measures for both surges and booms has been used with little checking of the robustness of results. We deal with this issue by replicating 14 different measures of capital surges (gross and net) and 5 credit boom proxies from the literature on a sample of 46 countries from 1981–2010. A second difficulty is that some previous studies have not distinguished between the proportions of surges followed by booms and booms preceded by surges. We found substantial differences between these two relationships. While there is a good deal of variation in the individual correlations the vast majority of the calculated probabilities of a surge being followed by a credit boom fall within the range of 4 % to 13 %. Although the proportion of credit booms preceded by surges is higher, the correlations for both directions are much lower than are frequently assumed. While the probabilities of a surge being followed by a credit boom generally increased from the 1980s to the 1990s they fell again in the 2000s, suggesting the possibility that authorities have become better at limiting the adverse effects of surges on domestic credit growth.

Efremidze, Levan, John Rutledge, and Thomas D. Willett. "Capital Flow Surges As Bubbles: Behavioral Finance And Mckinnon’S Over-Borrowing Syndrome Extended." The Singapore Economic Review 61.02, 2016, 1640023.

Abstract:This paper explores how behavioral finance and complexity economics, along with imperfect information, faulty mental models and perverse incentive structures can cast light on the factors that generate the international capital flow surges and sudden stops that McKinnon described as the over-borrowing syndrome. While there has been a great deal of empirical research on this topic in recent years, there has been much less theoretical analysis of why these flows too often behave in such a volatile manner. Developing a better understanding of the forces driving capital flows should help us identify situations where capital flow surges are particularly likely to end in costly sudden stops and help policy makers decide how best to respond to such flows.

Owlett, Robert and Fan Yu. “A Re-Examination of Rating Shopping and Catering using Post-Crisis Data on CDOs,” Economics Letters 147, 2016, 164-167.

Abstract: We re-examine rating shopping and catering among CDOs by replicating a portion of Griffin, Nickerson, and Tang (2013) using post-crisis data. Our results are consistent with continued rating shopping and diminished rating catering behavior after the great financial crisis.

Batta, George, Jiaping Qiu, and Fan Yu. “Credit Derivatives and Analyst Behavior,” Accounting Review 91(5), 2016, 1315-1343.

Abstract:This paper presents a comprehensive analysis of the role of credit default swaps (CDS) in information production surrounding earnings announcements. First, we demonstrate that the strength of CDS price discovery prior to earnings announcements is related to the presence of private information and the illiquidity of the underlying corporate bonds, consistent with the CDS market being a preferred venue for informed trading. Next, we ask how the information revealed through CDS trading influences the output of equity and credit rating analysts. We find that post-CDS trading, the dispersion and error of earnings-per-share forecasts are generally reduced, and downgrades by both types of analysts become more frequent and more timely before large negative earnings surprises, suggesting that the CDS market conveys information valuable to financial analysts.