2017 Robert Day School Publications and Grants

Batta, George, and Volkan Muslu. “Credit Rating Agency and Equity Analysts' Adjustments to GAAP Earnings.” Contemporary Accounting Research, vol. 34, issue 2, 2017, pp. 783-817.

Abstract: Moody's analysts and sell-side equity analysts adjust GAAP earnings as part of their research. We show that adjusted earnings definitions of Moody's analysts are significantly lower than those of equity analysts when companies exhibit higher downside risk, as measured by volatility in idiosyncratic stock returns, volatility in negative market returns, poor earnings, and loss status. Relative to the adjusted earnings definitions of equity analysts, adjusted earnings definitions of Moody's analysts better predict future bankruptcies, yet they fare significantly worse in predicting future earnings and operating cash flows. These findings persist after controlling for optimism incentives of analysts, reporting incentives of companies, credit rating levels, and industry and year effects. Our findings suggest that credit rating agencies cater to their clients' demand for a more conservative interpretation of company-reported performance than what is offered by equity analysts.

Bjerk, David. "Mandatory Minimum Reform and the Sentencing of Crack Cocaine Defendants: An Analysis of the Fair Sentencing Act." Journal of Empirical Legal Studies, vol. 14, issue 2, 2017, pp. 370-396.

Abstract: The Fair Sentencing Act of 2010 (FSA) affected the U.S. federal mandatory minimum sentencing laws for to crack cocaine offenders, and represented the first Congressional reform of sentencing laws in over 20 years. A primary goal of this legislation was to lessen the harshness of sentences for crack cocaine offenders and decrease the sentencing gap between crack defendants and powder cocaine defendants. While both the mean sentence length for crack offenders fell following the implementation of the FSA, these changes appear to primarily reflect the continuation of on-going sentencing trends that were initiated by a variety of non-Congressional reforms to federal sentencing policy that commenced around 2007. However, the FSA appears to have been helpful in allowing these trends to continue past 2010.


Bjerk, David. "Mandatory Minimums and the Sentencing of Federal Drug Crimes." Journal of Legal Studies, vol. 46, no. 1, 2017, pp. 93-128.

Abstract: The United States federal mandatory minimums have been controversial not only because of the length of the mandatory sentences for even first-time offenders, but also because the eligibility quantities for crack are very small when compared to those for other drugs. This paper shows that the actual impact of these mandatory minimums on sentencing is quite nuanced. A large fraction of mandatory minimum eligible offenders, particularly first-time offenders, are able to avoid these mandatory minimums. Moreover, despite lower quantity eligibility thresholds for crack, a smaller fraction of crack offenders are eligible for mandatory minimums relative to other drugs. Furthermore, while being just eligible for a mandatory minimum increases sentence length on average, the impact is not uniform across drugs. Notably, sentences for crack offenders are generally sufficiently long such that, on average, sentences for crack offenders are not impacted by eligibility for a mandatory minimum. In summary, the discrepancy in federal sentencing between crack offenders and those convicted for other drugs does not appear to be driven by mandatory minimums, but rather other aspects of federal sentencing policy and norms.

Burdekin, Richard C.K. "The Renminbi's Role Grows, But is the United States Being Left Behind?" China-U.S. Focus, March 10, 2017.


Burdekin, Richard C. K. and Ran Tao. "An Empirical Examination of Factors Driving the Offshore Renminbi Market." China Economic Journal, vol. 10, no. 3, 2017, pp. 287-304.

Abstract: Following the 2010 establishment of the offshore renminbi market in Hong Kong, renminbi deposits there quickly rose above RMB 1 trillion. In this paper we examine fluctuations between the offshore value of the renminbi in Hong Kong and its onshore value in mainland China. The size of the spot market spread appears to be influenced by stock market sentiment as reflected in the spread between A-share listed in Shanghai and H-shares listed in Hong Kong. There is also some evidence of a link between the spread and the pace of renminbi deposit growth in Hong Kong.

Evans, Mary F. and Scott M. Gilpatric. “Abatement, Care, and Compliance by Firms in Financial Distress.” Environmental and Resource Economics vol. 66, issue 4, 2017, pp. 765-794.

Abstract: We examine precautionary behavior, specifically compliance with environmental regulations, pollution abatement, and care spending, by firms facing two sources of insolvency risk. If poor profit or a liability triggers insolvency, then the firm forgoes a profitable future. The behavioral implications of this survival motive vary across firms. Firms for whom the principal insolvency risk is liability-related now choose precaution above the level chosen by the solvent firm. For firms whose primary insolvency risk is profit-related, the survival motive reinforces incentives for care below the solvent benchmark arising from the familiar judgment-proof effect.We also characterize how insolvency risks affect incentives to conceal adverse events linked to these choices, such as an accident or a regulatory violation. An understanding of these incentives is particularly important during recessionary periods when firms struggle to survive the downturn.

Fernholz, Ricardo T. “The Distributional Effects of Progressive Capital Taxes.” Journal of Economic Policy Reform, vol. 20, issue 2, 2017, pp. 99-112.

Abstract: Rising income and wealth inequality since the 1980s has spurred much research examining the underlying causes and potential policy responses. Among the more controversial, Piketty (2014) proposes a progressive capital tax as a response to rising top wealth shares around the world. This paper introduces rank-based econometric methods for dynamic power laws as a tool for estimating the effect of progressive capital taxes on the distribution of wealth. We use available data to approximate the shaping econometric factors of the U.S. wealth distribution, and then consider the effects of progressive capital taxes on these shaping factors. This yields empirical estimates of the distributional effects of progressive capital taxes under different assumptions about the impact of these taxes on household behavior. In most scenarios, we find that a small tax levied on just 1% of households would substantially reshape the U.S. wealth distribution and reduce inequality.


Fernholz, Ricardo T. “Nonparametric Methods and Local-Time-Based Estimation for Dynamic Power Law Distributions.” Journal of Applied Econometrics, vol. 32, issue 7, 2017, pp. 1244-1260.

Abstract: This paper introduces nonparametric econometric methods that characterize general power law distributions under basic stability conditions. These methods extend the literature on power laws in the social sciences in several directions. First, we show that any stationary distribution in a random growth setting is shaped entirely by two factors: the idiosyncratic volatilities and reversion rates (a measure of cross-sectional mean reversion) for different ranks in the distribution. This result is valid regardless of how growth rates and volatilities vary across different economic agents, and hence applies to Gibrat's law and its extensions. Second, we present techniques to estimate these two factors using panel data. Third, we describe how our results imply predictability as higher-ranked processes must on average grow more slowly than lower-ranked processes. We employ our empirical methods using data on commodity prices and show that our techniques accurately describe the empirical distribution of relative commodity prices. We also show that rank-based out-of-sample forecasts of future commodity prices outperform random-walk forecasts at a 1-month horizon.


Fernholz, Ricardo T., and Christoffer Koch. “Bank Asset Concentration Not Necessarily Cause for Worry.” Federal Reserve Bank of Dallas Economic Letter, vol. 12, issue 7, 2017, pp. 1-4.

Abstract: U.S. banking assets have become substantially more concentrated within a few large institutions. However, decreasing relative rates of big-bank growth and of idiosyncratic volatility—an indicator of individual bank susceptibility to shocks and a resulting redistribution of assets—suggest a reduction in systemic financial system risk through contagion.


Fernholz, Ricardo T., and Christoffer Koch. “Big Banks, Idiosyncratic Volatility, and Systemic Risk.” American Economic Review: Papers & Proceedings, vol. 107, no. 5, 2017, pp. 603-607.

Abstract: Starting in the 1990s, US bank assets grew more concentrated among a few large institutions. We explore the changing role of idiosyncratic volatility as a shaping force of the bank asset power law distribution. Our results reveal that idiosyncratic asset volatilities for bank-holding companies declined since the 1990s. To the extent that firm-specific shocks can have significant macroeconomic consequences, this result implies that even as one obvious source of aggregate risk and contagion--bank asset concentration--has increased, another important source--idiosyncratic volatility--has diminished.


Fernholz, Ricardo T., Kris James Mitchener, and Marc Weidenmier. “Pulling Up the Tarnished Anchor: The End of Silver as a Global Unit of Account.” Journal of International Money and Finance, vol. 74, 2017, pp. 209-228.

Abstract: We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s--the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system, in which the gold price of silver fluctuates, has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870-1913.

Filson, Darren, and Michelle Chamberlain. “Where are All the Innovators Hiding?” Talent Quarterly: The New Thinking Issue, issue 16, 2017, pp. 40-47.

Abstract: The article addresses three main questions: How does a liberal arts education help prepare someone to contribute to innovative organizations? Should recruiters seeking to enhance the innovative capabilities of their company consider candidates' exposure to the liberal arts among the characteristics they evaluate? And how might liberal arts backgrounds complement the other backgrounds in the organization?

Ganguly, Ananda, and Joshua Tasoff. "Fantasy and Dread: The Demand for Information and the Consumption Utility of the Future.” Management Science, 2017, vol. 63, issue 12, 2017, pp. 4016-4036.

Abstract: We present evidence that intrinsic demand for information about the future is increasing in expected future consumption utility. In the first experiment, subjects may resolve a lottery now or later. The information is useless for decision making, but the larger the reward, the more likely subjects are to pay to resolve the lottery early. In the second experiment, subjects may pay to avoid being tested for herpes simplex virus type 1 (HSV1) and the more highly feared type 2 (HSV2). Subjects are three times more likely to avoid testing for HSV2, suggesting that more aversive outcomes lead to more information avoidance. In a third experiment, subjects make choices about when to get tested for a fictional disease. Some subjects behave in a way consistent with expected utility theory, and others exhibit greater delay of information for more severe diseases. We also find that information choice is correlated with positive affect, ambiguity aversion, and time preference, as some theories predict

Curtis, Chadwick C., Julio Garín, and M. Saif Mehkari. "Inflation and the Evolution of Firm-Level Liquid Assets.” Journal of Banking and Finance, vol. 81, 2017, pp. 24-35.

Abstract: This paper shows that inflation has been an important determinant of firm-level liquid asset holdings. Liquid assets as a share of total assets - the cash ratio - for U.S. corporations steadily declined from the 1960s to the early 1980s, and has since steadily increased. Our empirical analysis finds that inflation is a key factor accounting for these changes. We show that these liquid asset holdings are imperfectly hedged against inflation. Hence, changes in inflation alter the real value of a firm's liquid asset portfolio causing them to readjust these balances.

Grant, Laura E., and Katherine K. Grooms. “Do Nonprofits Encourage Environmental Compliance?” Journal of the Association of Environmental and Resource Economists, vol. 4, no. S1, 2017, S261-88.

Abstract: When states incompletely monitor or enforce, environmental nonprofits step in. We estimate the impact of these groups on industrial compliance with the Clean Water Act, as well as their effect on government monitoring and enforcement. We geographically link annual panel data on facility inspection rates, pollution violations, and enforcement actions with information about nearby nonprofit watershed groups. In a ddition to two-stage least squares estimation for endogenous efforts of nonprofits, governments, and firms, we implement a recent advance in nonlinear methods with improved fit for our fractional dependent variables. As the number of nonprofit groups increase, government decreases inspections and firms have fewer severe effluent violations. The nonprofits' oversight substitutes for government efforts by interacting directly with facilities rather than putting pressure on regulatory mechanisms. The interventions by these environmental groups encourage compliance and, based on theory, improve efficiency.

Helland, Eric, Daniel Klerman, Brendan Dowling, and Alexander Kappner. "Contingent Fee Litigation in New York City.” Vanderbilt Law Review, vol. 70, 2017, pp. 1971-1992.

Abstract: Since 1957, New York courts have required contingent fee lawyers to file "closing statements" that disclose settlement amounts, lawyers' fees, an accounting of expenses, and other information. This Article provides a preliminary analysis of these data for the period 2004- 2013. Among this Article's findings are that settlement rates in New York state courts are very high (84%) relative to previous studies; that very few cases are resolved by dispositive motions; that litigated cases and settled cases have almost exactly the same average recovery; that median litigation expenses, other than attorney's fees, are 3% of gross recovery; that claims are disproportionately from poor neighborhoods; and that attorneys' fees are almost always one-third of net recovery, which is the maximum allowed by law.


Helland, Eric, and Jungmo Yoon. “Estimating Effects of English Rule on Litigation Outcomes." Review of Economics and Statistics, vol. 99, issue 4, 2017, pp. 678-682.

Abstract: The English rule prescribes that the loser of a lawsuit pays the winner's litigation costs. Previous research on the English rule finds that plaintiffs win more often at trial, receive higher awards, and receive larger settlements. Theory predicts that the English rule discourages settlement by raising the threshold payment necessary for settlement. In this paper, we reexamine the Florida experiment with the English rule by placing bounds on the selection effects. We find that the mean and median settlement amount increases. Collectively these findings are consistent with the predictions of the simplest models of the English rule's impact.

Lin, Jenny X., and William F. Lincoln. “Pirate’s Treasure." Journal of International Economics, vol. 109, issue C, 2017, pp. 235-245.

Abstract: Do countries that improve their protection of intellectual property rights gain access to new product varieties from technologically advanced countries? We build the first comprehensive matched firm level data set on exports and patents using confidential microdata from the US Census to address this question. Across several different estimation approaches, we find evidence that these protections affect where US firms export.

Ozbeklik, Serkan, and Janet Kiholm Smith. "Risk-Taking in Competitive Settings: Evidence from Match Play Golf Tournaments.” Journal of Corporate Finance, vol. 44, 2017, pp. 506-523.

Abstract: We test hypotheses regarding risk taking behavior of competitors in settings characterized by one-on-one, single elimination tournaments. We draw data from 579 professional golf matches and over 18,000 holes from 2003-2013 in tournaments where match-play scoring is used rather than stroke-play. Because of the uniqueness of the data, we are able to provide clean empirical tests of how risk taking is affected by horizon effects (holes remaining), peer effects arising from heterogeneity in player abilities, match status (whether behind or ahead), and the difficulty of the task/project (hole). The findings are applicable to corporate settings where only a few rivals compete for a prize, such as a winning bid, a promotion, market share dominance, patents, etc. Other applications include litigation contests and political elections..

Kim, Sangwan, KoEun Park, Joshua Rosett, and Yong-Chul Shin. "The Benefit of Labor Cost Disclosure: Evidence from Analyst Earnings Forecast Accuracy.” Managerial Finance, vol. 43, issue 5, 2017, pp.510-527.

Abstract: Purpose: The purpose of this paper is to investigate whether sell-side equity analysts use labor cost information when forming expectations of future earnings. The availability of disaggregated earnings components will benefit financial statement users to the extent that the additional information released by a firm is useful to infer differential persistence of disaggregated earnings components. Design/methodology/approach: This paper employs ordinary least squares, logit, and two-stage Heckman (1979) regressions which test whether analysts incorporate labor cost information into their earnings forecasts after controlling for a managerial self-selection to disclose labor costs, and further test whether a firm’s decision to voluntarily disclose labor costs improves analyst forecast accuracy. Findings: This research finds that analysts incorporate labor cost information into their earnings forecasts after controlling for other earnings components. More importantly, this research shows that voluntary disclosure of labor cost information is positively associated with analyst forecast accuracy. Additional tests show that the benefit of voluntary labor cost information is more pronounced for firms with high information uncertainty and for analysts with less firm-specific experience and analysts affiliated with small brokerage houses. Originality/value: This paper contributes to the literatures on the effect of labor cost on investors’ behavior and on analyst-specific factors in explaining analyst ability to predict future earnings.

Ozbeklik, Serkan, and Janet Kiholm Smith. "Risk-Taking in Competitive Settings: Evidence from Match Play Golf Tournaments.” Journal of Corporate Finance, vol. 44, 2017, pp. 506-523.

Abstract: We test hypotheses regarding risk taking behavior of competitors in settings characterized by one-on-one, single elimination tournaments. We draw data from 579 professional golf matches and over 18,000 holes from 2003-2013 in tournaments where match-play scoring is used rather than stroke-play. Because of the uniqueness of the data, we are able to provide clean empirical tests of how risk taking is affected by horizon effects (holes remaining), peer effects arising from heterogeneity in player abilities, match status (whether behind or ahead), and the difficulty of the task/project (hole). The findings are applicable to corporate settings where only a few rivals compete for a prize, such as a winning bid, a promotion, market share dominance, patents, etc. Other applications include litigation contests and political elections.