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Want to stay on top of cutting-edge finance research from Wharton? Every two months, the Rodney White Center highlights the latest studies by Wharton’s finance faculty. In this issue: the impacts of impact investing, collusion in the distressed-loan market, the macro effects of aging, new predictability in stock market returns, and political pushback to ESG. 

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Itamar Drechsler and Luke Taylor

Professor Jules van Binsbergen finds small impacts from impact investing   

In theory, ESG investing can help solve social and environmental problems by changing firms’ cost of capital. Currently, however, the effect of divestiture strategies on firms’ cost of capital is too small to meaningfully affect firms’ investment decisions.

Professor Winston Dou studies the effects of collusion in the distressed-loan market 

The loan market for distressed corporate borrowers is mainly intermediated by a small number of specialized institutional lenders which repeatedly syndicate, creating concerns about tacit collusion. The lack of competition among lenders, especially due to collusive practices and limited entry into a syndication, accounts for most of the risk-adjusted spread on distressed and DIP loans. If tacit collusion could be eliminated, distressed borrowers would obtain significantly larger loans at much lower spreads, but the credit accessibility of distressed borrowers could be compromised.

Professor Gideon Bornstein studies the macroeconomic effects of an aging population

Older households exhibit more “consumer inertia,” meaning they are less likely to buy from new firms. As the population ages, increasing consumer inertia makes it harder for new firms to enter and lets large incumbent firms charge higher prices. Aging helps explain why, in recent years, the share of young firms in the U.S. has declined while corporate profits have increased.

Ph.D. student Hongye Guo discovers new predictability in stock market returns

The U.S. stock market’s return during the first month of a quarter correlates strongly with returns in future months, but the correlation is negative if the future month is the first month of a quarter, and positive if it is not. An analogous pattern exists for industry returns, leading the well-known momentum effect to predictably fail in the first month of a quarter. These results challenge the commonly held belief that past stock returns do not predict future returns and suggest that investors make predictable mistakes when predicting future corporate earnings.

Professor Daniel Garrett finds large costs of political pushback to ESG

In 2021, the state of Texas prohibited municipalities from doing business with banks that have certain ESG policies. This led to the exit of five of the largest municipal bond underwriters from the state. Due to this exit, Texas municipalities will pay an estimated additional $303-$532 million in interest on the $32 billion in borrowing during the first eight months following the Texas laws.

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