That's Interesting
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The Rise of Alternatives
08th December, 2024Since the 2000s, U.S. public pensions have shifted their risky investments towards alternative assets like private equity and hedge funds, some more aggressively than others. This paper explores several explanations for these cross-sectional trends, focusing on those implied by the mean-variance models used by most pensions.
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In the CEO We Trust: Negative Effects of Trust Between the Board and the CEO
01st December, 2024This study investigates whether and how trust between board members and the CEO (board–CEO trust) affects the performance of mergers and acquisitions. Contrary to conventional wisdom, it is found that firms with higher levels of board–CEO trust exhibit poor M&A performance.
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Accessing Private Markets: What Does It Cost?
28th November, 2024This paper provides the first empirical analysis of the costs of financial intermediation across private markets and a framework to estimate ex-post costs using observed fund terms.
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When a Crystal Ball Isn’t Enough to Make You Rich
26th November, 2024The authors ran an in-person, proctored experiment inspired by a 2016 tweet from Nassim Nicholas Taleb– “If you give an investor the next day’s news 24 hours in advance he would go bust in less than a year.” The authors called the experiment “The Crystal Ball Challenge.”
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Buffett’s Alpha
20th September, 2024Warren Buffett’s Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. The alpha became insignificant, however, when we controlled for exposure to the factors “betting against beta” and “quality minus junk.” Furthermore, we estimate that Buffett’s leverage is about 1.7 to 1, on average. Therefore, Buffett’s returns appear to be neither luck nor magic but, rather, a reward for leveraging cheap, safe, high-quality stocks.
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Rational Sustainability
12th June, 2024ESG is under attack from all sides. True believers wish to keep practicing ESG but call it something different; opportunists recognize that an ESG label no longer helps launch funds or attract customers; opponents seek to ban ESG outright. But if ESG is to be scrapped, what do we replace it with? This article proposes an alternative: “Rational Sustainability”. Sustainability refers to the goal – the creation of long-term value rather than the ticking of ESG boxes – which is of interest to all job titles and political leanings. Rational refers to the approach: it recognizes diminishing returns and trade-offs; it is based on evidence and analysis; and guards against irrational sustainability bubbles.
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End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
04th June, 2024This paper shows that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019, however, the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future.
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Financial Statement Analysis with Large Language Models
30th May, 2024This paper investigates whether an LLM can successfully perform financial statement analysis in a way similar to a professional human analyst. Standardized and anonymous financial statements was provided to GPT4 and the model was instructed to analyze them to determine the direction of future earnings. Even without any narrative or industry-specific information, the LLM outperformed financial analysts in its ability to predict earnings changes.
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Corporate Mergers and Acquisitions Under Lender Scrutiny
15th May, 2024This paper examines corporate mergers and acquisitions (M&A) outcomes under lender scrutiny. Using the unique shocks of U.S. supervisory stress testing, we find that firms under increased lender scrutiny after their relationship banks fail stress tests engage in fewer but higher-quality M&A deals. Evidence from comprehensive supervisory data reveals improved credit quality for newly originated M&A-related loans under enhanced lender scrutiny.
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The Evolving Index Effect: Evidence from Australia
09th May, 2024Evidence around the price response of stocks to index change announcements (the index effect) in Australia is mixed. In contrast to the U.S. market, results often point towards the absence of any index effects in Australia. By studying a comprehensive set of index announcements across S&P/ASX indexes, this article finds significant heterogeneity in the index effect across Australian securities. Additions to small capitalization indexes exhibit economically meaningful index effects, whereas additions to large capitalization indexes are largely insignificant.
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