Chotibhak Jotikasthira, Southern Methodist University
Christian Lundblad, University of North Carolina-Chapel Hill
Abstract: Using machine learning techniques, we uncover an important number of dealers in the U.S. municipal bond market who focus on geographically adjacent states, a characteristic distinct from dealer centrality. These “specialized” dealers enjoy larger market shares in states with greater local ownership and in local bonds with more complex features. We also find that trades intermediated by these specialized dealers have significantly larger markups than those intermediated by national dealers. For the average retail trade, about two-thirds of the differential markup is attributed to rent, with the remaining third to the unique benefits of specialization. Only the latter matters for institution-sized trades. Together, these results suggest that specialized dealers possess some monopoly power yet also provide important differentiated services. Specialized dealers provide immediacy, reward customers with an allocation of new bond offerings, help customers overcome information frictions, and facilitate access to local investor clientele. The latter two account for the bulk of the specialization benefits. Over time, as transparency improves and local ownership declines, the average market share of specialized dealers decreases along with differential markups.
Discussant: Sebastien Plante, University of Wisconsin-Madison
Abstract: We study the implications of deviations from covered interest rate parity for international capital flows using novel data covering euro-area derivatives and securities holdings. Consistent with a dynamic model of currency risk hedging, we document that investors’ holdings of USD bonds decrease following a widening in the USD-EUR cross-currency basis (CCB). This effect is driven by investors who need to roll over existing positions, and it is robust to instrumenting the CCB. These CCB-driven shifts in bond demand significantly affect government bond prices. Our findings shed new light on the determinants of international capital flows and have important consequences for financial stability.
Discussant: Pasquale Della Corte, Imperial College London
Abstract: We study the implications of equity’s combined cash flow and voting rights for price
informativeness and corporate policies. Using hand-collected data on dual-class shares, we show
that separating cash flow and voting rights improves the informativeness of share prices about
future cash flows and mitigates arbitrage frictions. The effects are stronger for dual-class shares
with no voting rights and when voting rights are more important, as measured by the occurrence
of close votes. Consistent with the role of voting rights in short-selling constraints, dual-class
shares respond less to negative earnings surprises, have larger average short positions, and do not
exhibit a shorting premium anomaly. Overall, we put forth a new proposition, unexplored in the
literature, that highlights price informativeness as a potential benefit of separating equity cash flow
and voting rights.
