DERA Working Papers

Working papers in the series were prepared in full or in part by SEC staff economists in the Division of Economic and Risk Analysis. They investigate a broad range of issues relevant to the Commission's mission and are disseminated to stimulate discussion and critical comment to the benefit of the public. DERA Working Papers are preliminary materials that have not been approved by the Commission and reflect only the views of the author(s).


The Economic Implications of Money Market Fund Capital Buffers

Craig M. Lewis new material
DERA Working Paper 2014-01


This paper develops an affine term structure for the valuation of money market funds. This valuation framework is then used to consider the economic implications of funds that are supported by a capital buffer. The main findings are twofold. First, relatively small capital buffers are capable of absorbing daily fluctuations between a fund's shadow price and its amortized cost. For example, a fund with a capital buffer of 60 basis points can absorb most day-to-day price risk. The ability to absorb large scale defaults, however, would require a significantly larger and more costly buffer. Second, because a buffer is designed to absorb credit risk, capital providers demand compensation for bearing this risk. The analysis shows that, after compensating capital buffer investors for absorbing credit risk, the returns available to money market fund shareholders are comparable to default free securities, which would significantly reduce the utility of the product to investors.


Differences in the Information Environment Prior to Seasoned Equity Offerings Under Relaxed Disclosure Regulation

Sarah B. Clinton, Joshua T. White and Tracie Woidtke
DERA Working Paper 2013-05


We examine whether the Securities Offering Reform (SOR), promulgated by the U.S. Securities and Exchange Commission in 2005, is associated with differences in disclosure and a richer information environment during seasoned equity capital formation. SOR eases disclosure restrictions and reduces uncertainty regarding disclosures allowed prior to a seasoned equity offering (SEO). We find more frequent disclosure of management earnings forecasts and Form 8-K filings during the month before an SEO under SOR. Earnings forecasts also are more accurate and 8-K filings contain more information during this time. In addition, we find a greater magnitude of information reflected in stock prices and more positive net returns under SOR concentrated in SEOs preceded by disclosure within a week before the issue date. Moreover, there is no reversal in returns after the issue date. Overall, these results suggest that SOR is associated with greater disclosure when investors commit to invest and assess the SEO price, which is related to a richer information environment with capital formation benefits.

Analyst Competition and Monitoring: Earnings Management in Neglected Firms

Laura Lindsey and Simona Mola
DERA Working Paper 2013-04


We investigate the analyst monitoring role using a sample of firms that lose and later regain analyst coverage along with alternative samples where loss of coverage is exogenous. Relative to otherwise similar firms that maintain coverage, dropped firms reverse earnings management from managing downward to upward, and firms that do so are more likely to regain analyst attention. After resumption of coverage, upward management is attenuated only for firms regaining coverage by multiple analysts. Our findings demonstrate that analysts select firms engaged in more aggressive reporting and suggest that the monitoring role is activated by competition rather than coverage itself.

The Effects of Regulating Hidden Add-on Costs

K. Jeremy Ko and Jared Williams
DERA Working Paper 2013-03


We examine the welfare effects of regulation in a model where firms can shroud add-on costs, such as penalty fees for consumer financial products. In isolation, imposing price controls or disclosure mandates on such costs can increase or decrease welfare, even when these regulations have no direct costs. There are, however, strong complementarities between price controls and disclosure mandates: conditional on disclosure being mandated, price controls always (weakly) increase welfare, and conditional on prices being sufficiently constrained, disclosure mandates always (weakly) increase welfare.

Appointments of Academic Directors

Joshua T. White, Tracie Woidtke, Harold A. Black and Robert L. Schweitzer
DERA Working Paper 2013-02


We examine the outside director selection process using unique data on appointments of academic directors. Overall, we find academic directors tend to be appointed by small- and mid-cap firms expanding their boards. However, we find important differences in both the factors influencing academic appointments and the market's reaction when allowing for heterogeneity. Academics in science, medicine and engineering appear to be appointed for their expertise, and the market reacts favorably. Academic administrators appear to be appointed for their networks, and the market reacts favorably when the administrator is affiliated with a business school but negatively when the administrator is not within close geographic proximity. Business and law professors appear to be appointed for general expertise and prestige, but we find little evidence of any significant market reaction.

Going Public Abroad

Cecilia Caglio, Kathleen Weiss Hanley and Jennifer Marietta-Westberg
DERA Working Paper 2013-01


This paper examines the decision to go public abroad using a sample of 17,808 IPOs. Although only 6% of initial public offerings are offered abroad, these represent approximately 25% of total IPO proceeds. We find that alleviating informational frictions in order to obtain greater offering proceeds is an important determinant of the decision to go public abroad. Foreign and global IPOs originate from countries with significantly fewer recent IPOs in the same industry, less developed capital markets, and lower disclosure standards. Contrary to assumptions in prior research, we also show that the determinants of whether to go public abroad or to go public at home and cross-list later are not similar. In addition, we find that the preferences for going public in certain foreign markets have changed over time and the factors that impact the choice of listing market are not consistent across all countries.