Current Research ReportsThe Glucksman Institute for Research in Securities Markets awards fellowships each year to outstanding second year Stern MBA students to work on independent research projects under a faculty member's supervision. Three research projects completed by the Glucksman Fellows of 2019-2020 are available below. These papers focus on important topics in empirical financial economics.
Richard Levich, Director
The U.S. Municipal Green Bond Market: An Examination of the Use of Proceeds
Green bonds represent a new financial product line developed with the goal of allocating more capital towards projects that have positive environmental and/or climate benefits. Green bonds have all the characteristics of traditional bonds with the additional feature designating that the “use of proceeds” from the bond goes toward driving positive environmental outcomes. The issuance of green bonds by both governments and businesses has been growing and is expected to reach $300bn USD in 2020. However, despite the increase in issuance, there is a lack of clarity on whether green bonds are actually allocating new capital toward environmentally beneficial projects or if projects that would have likely received funding anyway are simply adopting the green labeling.
In this study, we consider a sample of more than 2,000 green bonds issued over the 2010-2016 period. We analyze the official statement filings for each bond and among other screens, record whether each bond provides “new capital” or if the green bond was issued to refund an existing bond. Our results suggest that as much as 60% of green bonds reflect refunded or continuing projects rather than new capital aimed at climate benefits. These findings suggest that stronger regulation is needed to both appropriately define what can be considered a green bond and more clarity can be given as to how that capital is being used to finance environmentally supportive projects.
The Impact of Data Breaches on Stock Performance
This study focuses on the impact of data breach announcements on stock prices and returns of the affected companies. Data breaches are potentially devastating thefts of data, in many cases personally identifiable, from companies that could be used for a variety of nefarious purposes. While the public discourse suggests that companies are severely punished for becoming data breach targets, the reality is much more mixed, with stock price regressions (using predictions based on widely traded indexes and US Treasury instruments) showing negligible effect on the aggregate, and stock return regressions (using the CAPM model) demonstrating a minor effect on average. However, for companies that have outsized data breaches from both size and severity considerations, the impact on stock price and returns are much more pronounced in the test timeline. With vast quantities of personal data being collected daily by a growing number of companies, and regulators and the public more closely eyeing data protection issues, there is potential for harsher punishment for data breaches in the future.
The Evolution of the YieldCo Structure in the United States
Mauricio Franco Mitidieri
YieldCos were designed in the early 2010s as a new financial vehicle that owns and operates fully built and operational power generating projects. The structure was intended to create a dividend-focused company making this vehicle potentially more attractive to risk-averse retail investors as well as institutional investors. The initial market reception to YieldCos was favorable with the market capitalization of seven YieldCos reaching $17.8 billion by mid-2015. But almost as quickly following the bankruptcy of Sun Edison, a major renewable energy developer, the YieldCo market collapsed with market capitalization falling by more than half in just seven months. Today, essentially all the YieldCos have been acquired by institutional investors or private equity firms and are no longer publicly listed.
The purpose of this paper is to analyze the boom and bust cycle that enveloped the YieldCo market within the span of a decade. In many respects, the YieldCo market has followed a typical business learning curve with its introduction followed by a period of market hype, then bust, followed by restructuring and now a maturing sector. Overall, we conclude the YieldCo structure itself remains a viable mechanism for funding renewable energy projects. However, the future of the YieldCo structure will require a better governance relationship between the sponsor and the YieldCo as well as better alignment of long-term growth expectations.
Rising Interest Rates and the Future of U.S. Commercial Real Estate
Darrick E. Antell
This study focuses on the impact of rising interest rate environments on the valuation of commercial real estate and investment returns from holding such assets. Linear regression analyses using historical data show a statistically significant positive correlation between the most recent change in interest rates, and the ensuing returns on commercial real estate. In particular, these results suggest that during the period of one-to-three years after a significant rate increase, real estate returns have historically been higher than their long-run average. At the time of writing, a rising interest rate environment in the U.S. had generated widespread concern that discount rates on investment properties would increase, eroding their value. However, our findings indicate that other factors such as income growth have prevailed historically in such times, offsetting the increased discount rates. This paper discusses possible reasons for these observations, drawing on anecdotal evidence from real estate investors and developers, and proposing further topics of study related to the microeconomic factors driving these trends.
The Information Hypothesis Revisited
A Further Examination of the Performance of Targets of Failed Takeover Attempts
This study centers on the performance of targets of takeover offers after the initial offer is withdrawn. If these firms are not subsequently taken over by another bidder and if they were correctly valued before the initial takeover offer, their stock price should gradually revert to the pre-offer price. However, I find that firms for which relatively high premiums were offered do better than firms for which relatively low premiums were offered. This is surprising, because the initially offered premiums will not be paid out, and the intrinsic standalone value should not change because of the level of the premium. This finding supports the information hypothesis, which poses that some bidders possess superior information or insight that make them able to identify overvalued and undervalued targets. These bidders would be willing to pay higher premiums for undervalued targets, and lower premiums for overvalued targets. This would make targets for which a high premium is offered more likely to be undervalued, and vice versa, which would explain the findings. Targets of high offers continue to outperform targets of low offers even after the date on which the initial offer is withdrawn, which implies the market does not identify the high-premium targets as previously undervalued.
Trading Patterns Centered Around Large Institutional Purchase Events in the Indian Stock Markets
The Indian stock market is unique in that it contains one very large institutional investor – the Life Insurance Corporation of India (“LIC”). This is the state-run insurance company and is by far the largest investor in the stock markets (owing to its outsized presence in the Insurance market). LIC sometimes buys significant stakes in a company, and therefore, an investment (or conversely a sale) is usually enough to move the stock price by a significant amount. The hypothesis that this paper looks to examine is whether LIC’s trades are leaked to market participants beforehand, and whether such information is used to profit by front-running LIC’s trades in the market.
The Tracking Efficiency of Bond ETFs
This paper examines the existence and determinants of tracking errors for 2 bond exchange traded funds (ETFs) and 2 mutual funds that track the same indices in the US and the emerging markets (EM) in 2013-2018. Results show that all funds underperform their indices. However, ETF net asset value (NAV) produces the smallest tracking error when compared to the mutual fund NAV and the ETF price. In addition, the tracking errors for the EM funds are significantly greater than those of their US counterparts. The results also demonstrate that NAV and price are cointegrated for both bond ETFs, which is logical and reassuring for investors. The results likewise suggest that for both bond ETFs, when there is a price to NAV discrepancy today, it is in part (~2/3) corrected in the change in price tomorrow. Similarly, price to NAV error today makes up only a part of the price to NAV error tomorrow for both ETFs, a larger portion for the EM bond ETF vs. the US bond ETF. However, given that only a fraction of the mispricing is corrected, this suggests that price today may be forward-looking. Furthermore, the findings in this paper confirm that fluctuations in the stock market and changes in interest rates affect the price changes for both bond ETFs. The volatility in the underlying index only has an effect on the daily price to NAV mispricing of the EM bond ETF. Finally, FX fluctuations indirectly affect price changes in the EM bond ETF, even though it is comprised of foreign dollar-denominated bonds.
Corporate Venture Capital: Stock Market Reactions and Impact on Investee Exit
This study focuses on the impact of corporate venture capital (CVC) investments on the corporation’s stock price and on the investee’s exit probability. Event study results show no statistically significant stock market reaction to news of a CVC investment or an investee’s exit, except when reactions to investments with or without strategic alignment are compared. In these cases, investments in startups in a different industry to the corporate parent elicit a negative abnormal return, and in startups in the same industry a positive abnormal return. While the stock market reactions studied are immediate, the study also aims to identify longer term effects of CVC investments on the investee’s exit probability. Survival models built for this purpose identify investment characteristics including experience, funding size, co-investment, strategic alignment, and market conditions that positively and negatively affect exit probability. Notably, strategic alignment is found to lower exit probability. The paper discusses possible reasons for these findings, drawing on prior work and anecdotal evidence from CVC practitioners for support.
Should Amazon Be Broken Up? An Analysis of Valuations and U.S. Antitrust Laws in the 21st Century Economy
This paper examines the validity of the claim in the media that the significant rise in Amazon’s market capitalization and the size and scope of the e-commerce giant should make Amazon the focus of more antitrust scrutiny. Regulators have also questioned whether U.S. antitrust laws need to be revised to reflect the 21st century economy. This paper discusses this topic in the context of other platform-based tech giants such as Facebook and Google and presents event studies that show the stock market’s reactions to news of Amazon’s acquisitions. The results generally support some popular perceptions of Amazon’s activities but do not resolve the question of whether the high concentrations of power in firms such as Amazon are anticompetitive.
Review of New Enhanced Collective Action Clauses in Sovereign Debt Terms and the Resulting Impact on Borrowing Costs
This paper examines the emergence of new enhanced collective action clauses in sovereign debt terms and studies the resulting impact on borrowing costs as measured by spreads over relevant benchmark securities at issuance. When comparing sovereign debt issued before and after the development and widespread use of the new clauses, the paper finds mixed results with indications that borrowing costs may have increased for higher rated issuers electing to utilize the new terms. However, given the relatively short window of analysis and resulting limited sample size, additional study is warranted before a definitive conclusion can be reached on the effect of the new clauses.