THESMAR David

We analyze firm-level analyst forecasts during the COVID crisis. First, we describe expectations dynamics about future corporate earnings. Downward revisions have been sharp, mostly focused on 2020, 2021 and 2022, but much less drastic than the lower bound estimated by Gormsen and Koijen (2020). Analyst forecasts do not exhibit evidence of over-reaction: As of mid-May, forecasts over 2020 earnings have progressively been reduced by 16%. Longer-run forecasts, as well as expected “Long-Term Growth” have reacted much less than short-run forecasts, and feature less disagreement. Second, we ask how much discount rate changes explain market dynamics, in an exercise similar to Shiller (1981). Given forecast revisions and price movements, we estimate an implicit discount rate going from 10% in mid-February, to 13% at the end of March, back down to their initial level in mid-May. We then decompose discount rate changes into three factors: changes in unlevered asset risk premium (0%), increased leverage (+1%) and interest rate reduction (-1%). Overall, analyst forecast revisions explain most of the decrease in equity values between January 2020 and mid May 2020, but they do not explain shorter term stock market movements.

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We measure how shareholders value a firm's ethical actions via an experiment. Our findings are threefold. First, the "selfish investor hypothesis'' is strongly rejected. Participants are willing to pay $ .7 more for buying a share in a firm giving one more dollar per share to charities. Symmetrically, a firm that makes profits by exercising a negative externality of $1 on a charity is valued $.9 less than a similar company with no externality. The scaling of non-pecuniary preferences is linear: doubling the size of a social externality doubles its impact on willingness to pay. Second, the data show that whether investors are pivotal or not with regard to the ethical actions of the firm does not affect their willingness to pay. Third, when participants make investment decisions on behalf of a third party (delegation), their generosity level remains similar. Our results appear to be compatible with a utility model where non-pecuniary benefits are conditional on stock holding.

The three chapters of this thesis study the financial choices of households over the course of their lives. In the first chapter, I use French administrative data on job-creating entrepreneurs to estimate a life-cycle model in which risk-averse individuals can start a business and return to wage employment. I estimate that the unobserved benefits of entrepreneurship amount to 6,100 euros per year, or 67,000 over the lifetime of a firm. In the second chapter, I estimate a portfolio choice model that takes into account the relationship between stock market returns and the asymmetry of idiosyncratic income shocks. The cyclicality of this asymmetry may explain why young or modestly wealthy households invest little in the stock market, and why the share of their wealth invested in stocks grows until retirement age.In the third chapter, I calibrate a portfolio choice model in which the labor market and the stock market are cointegrated. I estimate that the certainty equivalent of pension entitlements for employed households is 46% lower than the sum of annualized payments at the risk-free rate. At the national level, the adjusted value of pension entitlements is $19.6 trillion, or 37% less than the unadjusted value of $31 trillion.

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While a mature literature shows that credit constraints causally affect firm level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses.

There is a discrepancy between CAPM-implied and realized returns. Using the CAPM in capital budgeting -- as recommended in finance textbooks -- should thus have valuation effects. For instance, low beta projects should be valued more by CAPM-using managers than by the market. This paper empirically tests this hypothesis using publicly announced M&A decisions and shows that takeovers of lower beta targets are accompanied by lower cumulative abnormal returns for the bidders. Specifically, our estimates imply an average net loss to bidders corresponding to 12% of the average deal value and exceeding USD 10 billion per year in aggregate.

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We propose a theory of one of the most economically significant stock market anomalies, i.e. the "profitability" anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional predictions of the model: (1) analysts are on average too pessimistic regarding the future profits of high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks’ domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio – known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone. and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure. This view is consistent with the Efficient Market Hypothesis. The other view is the "behavioral view", which states that some investors persistently underestimate the true value of high quality firms. We find no evidence in favor of the "risk view": The returns from investing in quality firms are abnormally high on a risk-adjusted basis, and are not prone to crashes. We provide novel evidence in favor of the "behavioral view": In their forecasts of future prices, and while being overall overoptimistic, analysts systematically underestimate the future return of high quality firms, compared to low quality firms.

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This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure. This view is consistent with the Efficient Market Hypothesis. The other view is the "behavioral view", which states that some investors persistently underestimate the true value of high quality firms. We find no evidence in favor of the "risk view": The returns from investing in quality firms are abnormally high on a risk-adjusted basis, and are not prone to crashes. We provide novel evidence in favor of the "behavioral view": In their forecasts of future prices, and while being overall overoptimistic, analysts systematically underestimate the future return of high quality firms, compared to low quality firms.

We document investment distortions induced by the use of a single\ud discount rate within firms. According to textbook capital budgeting,\ud firms should value any project using a discount rate determined by the\ud risk characteristics of the project. If they use a unique company-wide\ud discount rate, they overinvest (resp. underinvest) in divisions with a\ud market beta higher (resp. lower) than the firm's core industry beta.\ud We directly test this consequence of the WACC fallacy and establish\ud a robust and significant positive relationship between division-level investment and the spread between the division's market beta and the\ud firm's core industry beta. Consistently with bounded rationality theories, this bias is stronger when the measured cost of taking the wrong discount rate is low, for instance, when the division is small. Finally,we measure the value loss due to the WACC fallacy in the context of acquisitions. Bidder abnormal returns are higher in diversifying mergers and acquisitions in which the bidder's beta exceeds that of the target. On average, the present value loss is about 0.7% of the bidder's market equity.

We empirically explore the fragility of wholesale funding of banks, using transaction level data on short-term, unsecured certificates of deposits in the European market. We do not observe any market-wide freeze during the 2008-2014 period. Yet, many banks suddenly experience funding dry-ups. Dry-ups predict, but do not cause, future deterioration of bank performance. Furthermore, in periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. Thus, we fail to find evidence consistent with classical adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders.

The capital of a bank is a key element of their soundness and in this thesis we examine its dynamics. Chapter 2 shows that the introduction of a deposit guarantee leads banks to increase their leverage. However, bank responses are heterogeneous: the effect decreases with size, systemicity and initial capitalization so that the largest banks and the initially least capitalized banks do not respond to the adoption of a deposit guarantee. Chapter 3 proposes a new measure to quantify the aggregate capitalization of banking sectors by considering market discipline and the regulatory framework. This index allows us to study how capital shortfalls relative to a bank-specific implied capital target induce aggregate credit fluctuations. The capitalization index is consistent with the Bank Lending Survey and is significantly correlated with future aggregate credit fluctuations, particularly during episodes of undercapitalization. Chapter 4 is not about bank capital but studies the impact of scientific standards and conventions (statistical significance levels) on the behavior of researchers. We identify irregularities in the distribution of t-stats from empirical papers and interpret these as the result of distorted incentives. Our identification allows us to separate publication bias from what we call inflation bias: the fact that researchers are tempted to inflate marginally rejected tests by choosing a "significant" specification.

In these times of financial crisis, the markets are unanimously opposed: they are accused of starving the people and undermining the foundations of democracy by putting the States under tutelage. But the crisis does not explain everything. The markets seem to have abandoned their role as "financiers" of the economy to become virtual casinos (credit derivatives, robot traders programmed by doctors in physics, bonuses and insane risk-taking that can push banks into bankruptcy...). Politicians, entrepreneurs and citizens no longer understand the usefulness of markets. This book takes up this debate. As is often the case in economics, the devil is in the details. Through their in-depth analyses, the contributors of this book remind us that markets remain useful but diagnose their dysfunctions. They deduce from this that there are ways of regulating markets that are supervised and reconciled with society.

Due to non-linear transaction costs, the financial performance of a trading strategy decreases with portfolio size. Using a dynamic trading model a la Garleanu and Pedersen (2013), the authors derive closed-form formulas for the performance-to-scale frontier reached by a trader endowed with a signal predicting stock returns. The decay with scale of the realized Sharpe ratio is slower for strategies that (1) trade more liquid stocks (2) are based on signals that do not fade away quickly and (3) have strong frictionless performance. For an investor ready to accept a Sharpe reduction by 30%, portfolio scale (measured in dollar volatility) is given by a simple formula that is a function of the frictionless Sharpe, a measure of price impact, and a measure of the speed at which the signal fades away. They apply the framework to four well-known strategies. Because stocks have become more liquid, the capacity of strategies has increased in the 2000s compared to the 1990s. Due to high signal persistence, the capacity of a "quality" strategy is an order of magnitude larger than the others and is the only one highly scalable in the mid-cap range.

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Due to non-linear transaction costs, the financial performance of a trading strategy decreases with portfolio size. Using a dynamic trading model a la Garleanu and Pedersen (2013), we derive closed-form formulas for the performance-to-scale frontier reached by competitive traders endowed with a signal predicting stock returns. The decay with scale of the realized Sharpe ratio is slower for strategies that (1) trade more liquid stocks (2) are based on signals that do not fade away quickly and (3) have strong frictionless performance. We apply the framework to four well-known strategies. The capacity of strategies has increased in the 2000s compared to the 1990s due to increased liquidity. Because low volatility and past accounting profitability are persistent characteristics, strategies based on them are highly scalable, including in the mid-cap range. When traders underestimate the number of competitors trading a similar signal, their performance is strongly negatively impacted.

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How do crises affect Central clearing Counterparties (CCPs)? We focus on CCPs that clear and guarantee a large and safe segment of the repo market during the Eurozone sovereign debt crisis. We start by developing a simple framework to infer CCP stress, which can be measured through the sensitivity of repo rates to sovereign CDS spreads. Such sensitivity jointly captures three effects: (1) the effectiveness of the haircut policy, (2) CCP member default risk (conditional on sovereign default) and (3) CCP default risk (conditional on both sovereign and CCP member default). The data show that, during the sovereign debt crisis of 2011, repo rates strongly respond to movements in sovereign risk, in particular for GIIPS countries, indicating significant CCP stress. Our model suggests that repo investors behaved as if the conditional probability of CCP default was very large.

This paper shows that collateral constraints restrict firm entry and post-entry growth, even in the long-run. We use French administrative data and exploit cross-sectional variation in local house-price appreciation as shocks to the value of collateral available to homeowners. We control for local demand shocks by comparing homeowners to two control groups that live in the same region but do not experience collateral shocks: (i) renters and (ii) homeowners with a mortgage outstanding, who - in France - cannot take out a second mortgage on their house. In both comparisons, we find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral use more debt, start larger firms, and remain significantly larger even six years after creation.

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This paper shows that collateral constraints restrict firm entry and post-entry growth, even in the long-run. We use French administrative data and exploit cross-sectional variation in local house-price appreciation as shocks to the value of collateral available to homeowners. We control for local demand shocks by comparing homeowners to two control groups that live in the same region but do not experience collateral shocks: (i) renters and (ii) homeowners with a mortgage outstanding, who - in France - cannot take out a second mortgage on their house. In both comparisons, we find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral use more debt, start larger firms, and remain significantly larger even six years after creation.

"To save jobs, we need to save industry", "It's up to the State to get us out of the slump and preserve growth", "The markets are the dictatorship of the short term", "The solution to the crisis is more Europe!" - these are all tough clichés that rot the public debate in France, maintain the ambient gloom and end up sinking the country. Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing the lobbies that sustain them and addressing a number of very concrete questions: Why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money?]

The authors study a dynamical model of interconnected firms which allows for certain market imperfections and frictions, restricted here to be myopic price forecasts and slow adjustment of production. Whereas the standard rational equilibrium is still formally a stationary solution of the dynamics, the authors show that this equilibrium becomes linearly unstable in a whole region of parameter space. When agents attempt to reach the optimal production target too quickly, coordination breaks down and the dynamics becomes chaotic. In the unstable, "turbulent", phase the aggregate volatility of the total output remains substantial even when the amplitude of idiosyncratic shocks goes to zero or when the size of the economy becomes large. In other words, crises become endogenous. This suggests an interesting resolution of the "small shocks, large business cycles" puzzle.

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This thesis consists of four articles. The first article with Johan Hombert shows that when banking relationships are affected, this reduces the number of innovative firms and also leads to an increase in the geographic mobility of inventors, who leave states where banking relationships are degraded. The second article is a paper with Claire Célerier highlighting the role of supply in the phenomenon of unbanking of the poor in the United States. The third article studies innovation externalities and shows that when some firms innovate less, other local firms innovate less in response. This effect decreases rapidly with distance. The fourth paper, in collaboration with Olivier Dessaint, shows that managers systematically respond to liquidity shocks close to them by temporarily increasing their treasury.

This dissertation is composed of three distinct chapters, which aim to empirically analyze financial innovation in different fields: household finance, public finance, and the financial sector. The first chapter, written in collaboration with Claire Célérier, analyzes the increasing complexity of financial products offered to retail investors and suggests that this complexity is used by banks to reduce competitive pressure. The second chapter, written with Christophe Pérignon, focuses on toxic loans issued by local governments, and how their use is part of a political incentive system. The third chapter examines how the adoption of an innovative type of bond, representing conditional capital, can contribute to solving the dilemma of bank leverage.

The gradual disappearance of inflation fears during the era of the macroeconomic "Great Moderation" is now a thing of the past: the US financial crisis of the "Subprimes", the "Great Recession" as well as the subsequent sovereign debt crisis have led to a new economic order characterized by increased inflation volatility, increased commodity price shocks and mistrust of the creditworthiness of some sovereign issuers, to mention only three characteristics. From the reduction of inflation-indexed sovereign debt issuance to negative real rates and very long maturities, this new situation tends to jeopardize both conventional inflation-hedging strategies and purely nominal directional strategies. This thesis aims to investigate the effects of these events that have changed the macro-financial landscape and to evaluate their consequences in terms of inflation hedging, both in the asset-liability management of institutional investors and in the savings of individuals. Three alternative hedging strategies are proposed to deal with them.

We study the effect of investor horizons on corporate behavior. We argue that longer investor horizons attenuate the effect of stock mispricing on corporate policies. Consistent with our argument, we find that when a firm is undervalued, greater long-term investor ownership is associated with more investment, more equity financing, and less payouts to shareholders. Our results do not appear to be explained by long-term investor self-selection, monitoring (corporate governance), or concentration (blockholdings). Our results are consistent with a version of market timing in which mispriced firms cater to the tastes of their short-term investors rather than their long-term investors.

This paper provides empirical evidence consistent with the facts that (1) social networks may strongly affect board composition and (2) social networks may be detrimental to corporate governance. Our empirical investigation relies on a unique dataset on executives and outside directors of corporations listed on the Paris stock exchange over the 1992-2003 period. This data source is a matched employer employee dataset providing both detailed information on directors/CEOs and information on the firm employing them. We first find a very strong and robust correlation between the CEO's network and that of his directors. Networks of former high ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account (1) differences in unobserved directors' "abilities" and (2) the unobserved propensity of firms to hire directors from particular networks, irrespective of the CEO's identity. We then show that the governance of firms run by former civil servants is relatively worse on many dimensions. Former civil servants are less likely to leave their CEO job when their firm performs badly. Secondly, CEOs who are former bureaucrats are more likely to accumulate directorships, and the more they do, the less profitable is the firm they run. Thirdly, the value created by acquisitions made by former bureaucrats is lower. All in all, these firms are less profitable on average.

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We measure the impact of bank capital requirements on corporate borrowing and investment using loan-level data. The Basel II regulatory framework makes capital requirements vary across both banks and across firms, which allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 10%. Firms can attenuate this reduction by substituting borrowing across banks, but only partially. The resulting reduction in borrowing capacity impacts investment, but not working capital: Fixed assets are reduced by 2.6%, but lending to customers is unaffected.

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"To save jobs, we must save industry", "It's up to the State to get us out of the slump and preserve growth", "The markets are the dictatorship of the short term", "The solution to the crisis is more Europe!" - these are all tough clichés that rot the public debate in France, maintain the ambient gloom and end up sinking the country. Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing the lobbies that sustain them and addressing a number of very concrete questions: Why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money? Augustin Landier and David Thesmar decipher these obvious and harmful myths with a sharp pen, denouncing at the same time the lobbies that maintain them and addressing a number of very concrete questions: why are we afraid of robotization? What is the purpose of an engineer in the digital age? Why are our SMEs struggling to find money?]

The correlation across US states in house price growth increased steadily between 1976 and 2000. This paper shows that the contemporaneous geographic integration of the US banking market, via the emergence of large banks, was a primary driver of this phenomenon. To this end, we first theoretically derive an appropriate measure of banking integration across state pairs and document that house price growth correlation is strongly related to this measure of financial integration. Our IV estimates suggest that banking integration can explain up to one fourth of the rise in house price correlation over this period.

This thesis consists of four separate chapters. In the first chapter, I use an exogenous restriction on the ability of road haulage firms to grant payment terms to their customers. I show that some firms lend to their customers at the expense of their investments, their profitability and by exposing themselves to the risk of default. In the second chapter, I show that investment funds with a long time horizon choose younger firms at a less advanced stage of development. Firms invested by funds with a longer time horizon increase their patent stock faster than those invested by funds with a shorter time horizon. The third chapter is the result of a collaboration with Ron Kaniel and David Sraer. We use detailed broker data and undertake a quantitative exploration of individual investor behavior during the 2008 financial crisis. We show that investors who look the most sophisticated in the pre-crisis period have a lower propensity to flee to risk-free assets, and a higher propensity to be liquidity providers and earn high returns during the crisis. In the fourth chapter, I explore the idea that households have limited knowledge of their portfolio's exposure to systematic risk factors, which leads them to make mistakes. This idea is applied to individual investors' decision to actively rather than passively invest in equity markets.

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