Publications
25 results found
Bolton P, Kacperczyk M, 2023, Global pricing of carbon-transition risk, The Journal of Finance, Vol: 78, Pages: 3677-3754, ISSN: 0022-1082
The energy transition away from fossil fuels exposes companies to carbon-transition risk. Estimating the market-based premium associated with carbon-transition risk in a cross section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.
Edmans A, Kacperczyk M, 2022, Sustainable finance, Review of Finance, Vol: 26, Pages: 1309-1313, ISSN: 1382-6662
Sustainable finance—the integration of environmental, social, and governance (“ESG”) issues into financial decisions—is an increasingly important topic. Within companies, sustainability is no longer an ancillary issue confined to corporate social responsibility departments, but a CEO-level issue fundamental to the core business. Within the investment industry, sustainability used to be the exclusive domain of “socially responsible investors” who had social as well as financial objectives, but is now mainstream and includes investors with purely financial goals. This article introduces the RF Special Issue on Sustainability. It highlights three reasons for the rapid rise in sustainable finance—its financial relevance, its contribution to nonfinancial objectives, and investor tastes. It then summarizes the eight articles in the Special Issue, in particular drawing out their contributions to the literature. Finally, we offer ideas for future research.
Bolton P, Halem Z, Kacperczyk M, 2022, The financial cost of carbon, Journal of Applied Corporate Finance, Vol: 34, Pages: 17-29, ISSN: 1078-1196
Climate finance is first and foremost a risk-management problem, which means three things for investors. First, prudent investors will seek to hedge climate change risk by reducing their exposure to this risk. Second, investors will demand compensation for holding this risk. Third, investors will engage with companies to urge them to reduce this risk if they are not adequately compensated for it.For companies, the main implication of climate-risk management by investors is that the companies with greater carbon emissions will have to pay a higher financial cost of carbon (FCC). In their new study described in this article, the authors undertake a comprehensive analysis of the risk compensation implications of exposing investors to carbon transition risk. They explore how corporate GHG emissions have affected the price-to-earnings (P/E) ratios of listed companies in Europe and the U.S. over the period 2016 to 2020. Their main finding is that financial markets are beginning to broadly discount companies whose high carbon emissions are viewed as subjecting them to higher levels of political and regulatory risk, and providing them with what amounts to a higher cost of capital.Although price-earnings ratios are generally lower for companies with higher emissions, the discount varies significantly by sector and across firm size, with larger companies experiencing the larger discounts. Although the carbon discount is similar in the U.S. and in Europe, the authors find significantly higher discounts in industries in Europe that are directly covered by carbon pricing through the EU ETS. They even find a small price discount on corporate debt for smaller issuers. Overall, what emerges is a clear pattern of investors' growing concern over climate risk, which translates into an increasingly material FCC for companies with high GHG emissions. This growing valuation discount for companies with high emissions should encourage them to progress further along their decarbonization pa
Fong K, Hong H, Kacperczyk M, et al., 2022, Do security analysts discipline credit rating agencies?, The Review of Corporate Finance Studies, Vol: 11, Pages: 815-848, ISSN: 2046-9128
Credit ratings of corporations are biased, but the forces driving this bias are unclear. We argue it would be difficult for rating agencies to issue high grades for a firm’s debt when there are a lot of objective equity analyst reports about the firm’s earnings that are informative about its default. We find that an exogenous drop in analyst coverage leads to greater optimism-bias in ratings, especially for firms with little bond analyst coverage and those that are close to default. This coverage-induced shock leads to less informative ratings about future defaults and downgrades and more subsequent bond security mispricings.
Bolton P, Kacperczyk M, Samama F, 2022, Net-zero carbon portfolio alignment, Financial Analysts Journal, Vol: 78, Pages: 19-33, ISSN: 0015-198X
We outline a simple and robust methodology to align portfolios with a science-based, carbon budget consistent with maintaining a temperature rise below 1.5 °C with 83% probability. We show how to keep the tracking error at a negligible level. This approach works for both passive and active managers. It also establishes an exit roadmap for carbon-intensive corporates, thereby generating a form of competition to decarbonize within each sector. We also discuss four sources of risks: uncertainty around a rapidly shrinking carbon budget, time impacts on decarbonization rates, implementation risk due to market-wide selling pressure, and uncertainty about taxes on polluting companies.
Jin D, Kacperczyk MT, Kahraman B, et al., 2022, Swing pricing and fragility in open-end mutual funds, The Review of Financial Studies, Vol: 35, Pages: 1-50, ISSN: 0893-9454
How can fragility be averted in open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor-level transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces outflows during market stress. Swing pricing also reduces concavity in the flow-performance relationship and dilution in fund performance.
Bolton P, Kacperczyk MT, 2021, Do investors care about carbon risk?, Journal of Financial Economics, Vol: 142, Pages: 517-549, ISSN: 0304-405X
We study whether carbon emissions affect the cross-section of US stock returns. We find that stocks of firms with higher total carbon dioxide emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors. We cannot explain this carbon premium through differences in unexpected profitability or other known risk factors. We also find that institutional investors implement exclusionary screening based on direct emission intensity (the ratio of total emissions to sales) in a few salient industries. Overall, our results are consistent with an interpretation that investors are already demanding compensation for their exposure to carbon emission risk.
Kacperczyk MT, Perignon C, Vuillemey G, 2021, The private production of safe assets, The Journal of Finance, Vol: 76, Pages: 495-535, ISSN: 0022-1082
Using high-frequency, granular panel data on short-term debt securities issued in Europe, we study the existence, empirical boundaries, and fragility of private assets’ safety. We show that only securities with the shortest maturities, issued by banks (certificates of deposit, or CDs), benefit from a safety premium. The supply of such CDs responds positively to excess safety demand. During periods of stress, this relation vanishes for all issuers of private securities, even though their aggregate volumes do not collapse. Other dimensions of heterogeneity, including issuers’ balance sheets or their domicile countries’ fiscal capacity, are less relevant for private safety.
Kacperczyk M, Sundaresan S, Wang T, 2021, Do foreign institutional investors improve price efficiency?, The Review of Financial Studies, Vol: 34, Pages: 1317-1367, ISSN: 0893-9454
We study the impact of foreign institutional investors on price efficiency withfirm-level international data. Using MSCI index inclusion and the U.S. Jobsand Growth Tax Relief Reconciliation Act as exogenous shocks to foreignownership, we show that greater foreign ownership increases stock priceinformativeness, especially in developed economies. This increase arises fromnew information that foreign investors bring in, and displacement of lessinformed domestic retail investors. Finally, we show that foreign ownership,particularly from active investors, increases market liquidity, reduces firms’cost of equity, and increases firms’ real investment growth. (JELG11, G12,G14, G15)
Kacperczyk MT, Pagnotta E, 2019, Chasing private information, The Review of Financial Studies, Vol: 32, Pages: 4997-5047, ISSN: 0893-9454
Using over 5000 equity and option trades unequivocally based on nonpublic information about firm fundamentals, we find that commonly used asymmetric information proxies (AIPs) display abnormal values on days with informed trading. Volatility and trading volume are abnormally high, whereas illiquidity is low, both in equity and option markets. Daily returns reflect the sign of private signals but, on average, bid–ask spreads are 10% and 20% lower when informed investors are present in stock and option markets. Market makers’ learning under event uncertainty and the use of limit orders by informed investors help explain these findings. We characterize cross-sectional responses based on the duration of private information and find that informed traders select days with high uninformed volume to trade. Evidence from the U.S. Securities and Exchange Commission (SEC) Whistleblower Reward Program and the Financial Industry Regulatory Authority (FINRA) involvement address potential selection concerns.
Kacperczyk M, Nosal J, Stevens L, 2019, Investor sophistication and capital income inequality, Journal of Monetary Economics, Vol: 107, Pages: 18-31, ISSN: 0304-3932
Capital income inequality is large and growing fast, accounting for a significant portion of total income inequality. We study its growth in a general equilibrium portfolio choice model with endogenous information acquisition and heterogeneity across household sophistication and asset riskiness. The model implies capital income inequality that grows with aggregate information technology. Investors differentially adjust both the size and the composition of their portfolios, as unsophisticated investors retrench from trading risky securities and shift their portfolios to safer assets. Technological progress also reduces aggregate returns and increases the volume of transactions, features that are consistent with recent U.S. data.
Di Maggio M, Kacperczyk M, 2017, The unintended consequences of the zero lower bound policy, Journal of Financial Economics, Vol: 123, Pages: 59-80, ISSN: 0304-405X
We study the impact of the zero lower bound interest rate policy on the industrial organization of the U.S. money fund industry. We find that in response to policies that maintain low interest rates, money funds: change their product offerings by investing in riskier asset classes; are more likely to exit the market; and reduce the fees they charge their investors. The consequence of fund closures resulting from interest rate policy is the relocation of resources in affected fund families and in the asset management industry in general, as well as decline in capital of issuers borrowing from money funds.
Kacperczyk M, Van Nieuwerburgh S, Veldkamp L, 2016, A rational theory of mutual funds' attention allocation, Econometrics, Vol: 84, Pages: 571-626, ISSN: 2225-1146
The question of whether and how mutual fund managers provide valuable services for their clients motivates one of the largest literatures in finance. One candidate explanation is that funds process information about future asset values and use that information to invest in high‐valued assets. But formal theories are scarce because information choice models with many assets are difficult to solve as well as difficult to test. This paper tackles both problems by developing a new attention allocation model that uses the state of the business cycle to predict information choices, which in turn, predict observable patterns of portfolio investments and returns. The predictions about fund portfolios' covariance with payoff shocks, cross‐fund portfolio and return dispersion, and their excess returns are all supported by the data. These findings offer new evidence that some investment managers have skill and that attention is allocated rationally.
Kacperczyk M, Van Nieuwerburgh S, Veldkamp L, 2014, Time-varying fund manager skill, The Journal of Finance, Vol: 69, Pages: 1455-1484, ISSN: 0022-1082
We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in booms and market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that weighs a fund's market timing more in recessions and stock picking more in booms. The measure displays more persistence than either market timing or stock picking alone and predicts fund performance.
Kacperczyk M, Schnabl P, 2013, How Safe Are Money Market Funds?, QUARTERLY JOURNAL OF ECONOMICS, Vol: 128, Pages: 1073-1122, ISSN: 0033-5533
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- Citations: 117
Kacperczyk M, Damien P, Walker SG, 2013, A new class of Bayesian semi-parametric models with applications to option pricing, QUANTITATIVE FINANCE, Vol: 13, Pages: 967-980, ISSN: 1469-7688
Chen HJ, Kacperczyk M, Ortiz-Molina H, 2012, Do Nonfinancial Stakeholders Affect the Pricing of Risky Debt? Evidence from Unionized Workers, REVIEW OF FINANCE, Vol: 16, Pages: 347-383, ISSN: 1572-3097
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- Citations: 96
Chen HJ, Kacperczyk M, Ortiz-Molina H, 2011, Labor Unions, Operating Flexibility, and the Cost of Equity, JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, Vol: 46, Pages: 25-58, ISSN: 0022-1090
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- Citations: 184
Hong H, Kacperczyk M, 2010, Competition and Bias, The Quarterly Journal of Economics, Vol: 125, Pages: 1683-1725, ISSN: 0033-5533
Kacperczyk M, Schnabl P, 2010, When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009, JOURNAL OF ECONOMIC PERSPECTIVES, Vol: 24, Pages: 29-50, ISSN: 0895-3309
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- Citations: 125
Hong H, Kacperczyk M, 2009, The price of sin: The effects of social norms on markets, JOURNAL OF FINANCIAL ECONOMICS, Vol: 93, Pages: 15-36, ISSN: 0304-405X
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- Citations: 898
Brown S, Kacperczyk M, Ljungqvist A, et al., 2009, Hedge Funds in the Aftermath of the Financial Crisis, Financial Markets, Institutions & Instruments, Vol: 18, Pages: 155-156, ISSN: 0963-8008
Kacperczyk M, Sialm C, Zheng L, 2008, Unobserved Actions of Mutual Funds, REVIEW OF FINANCIAL STUDIES, Vol: 21, Pages: 2379-2416, ISSN: 0893-9454
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- Citations: 299
Kacperczyk M, Seru A, 2007, Fund manager use of public information: New evidence on managerial skills, JOURNAL OF FINANCE, Vol: 62, Pages: 485-528, ISSN: 0022-1082
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- Citations: 165
Kacperczyk M, Sialm C, Zheng L, 2005, On the industry concentration of actively managed equity mutual funds, JOURNAL OF FINANCE, Vol: 60, Pages: 1983-2011, ISSN: 0022-1082
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- Citations: 473
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