First Look

Abstract—Low beta stocks have offered a combination of low risk and high returns. We decompose the anomaly into micro and macro components. The micro component comes from the selection of low beta stocks. The macro component comes from the selection of low beta countries or industries. The two parts both contribute to the low beta anomaly, with important implications for the construction of managed volatility portfolios.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45597

Abstract—Existing apology research has conceptualized apologies as a device to rebuild relationships following a transgression. As a result, apology research has failed to investigate the use of apologies for outcomes for which individuals are obviously not culpable (e.g., apologies for heavy traffic or bad weather). In this paper, we define superfluous apologies as expressions of regret for an undesirable circumstance for which the apologizer is clearly not responsible. Across four studies, we find that issuing a superfluous apology demonstrates empathic concern, which motivates an increase in trust and liking.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45471

Abstract—We study incentives to invest in platform quality in open-source and proprietary two-sided platforms. Open platforms have open access, and developers invest to improve the platform. Proprietary platforms have closed access, and investment is done by the platform owner. We present five main results. First, open platforms may benefit from limited developer access. Second, an open platform may lead to higher investment than a proprietary platform. Third, opening one side of a proprietary platform may lower incentives to invest in platform quality. Fourth, the structure of access prices of the proprietary platform depends on (i) how changes in the number of developers affect the incentives to invest in the open platform, and (ii) how investment in the open platform affects the revenues of the proprietary platform. Finally, a proprietary platform may benefit from higher investment in the open platform. This result helps explain why the owner of a proprietary platform such as Microsoft has chosen to contribute to the development of Linux.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45560

Abstract—One of the challenges companies claim to face in making sustainability a core part of their strategy and operations is that the market does not care about sustainability, either in general or because the time frames in which it matters are too long. The response of investors who say they care about sustainability-and their numbers are large and growing-is that companies do a poor job in providing them with the information they need to take sustainability into account in their investment decisions. Whatever the merits of each view, the fact remains that an effective conversation about sustainability requires the participation of both sides of the market. There are two main mechanisms for companies to communicate to the market as a way of starting this conversation: mandated reporting and quarterly conference calls. In this paper, the authors argue that neither companies nor investors can be seen as taking sustainability seriously unless it is integrated into the quarterly earnings call. Until that happens, the core business and sustainability are two separate worlds, each of which has its own narrator telling a different story to a different audience. The authors illustrate their argument using the case of SAP, the German software company. SAP was the first company to host an "ESG Briefing," a conference call for analysts and investors held on July 30, 2013 in which the company discussed both its sustainability performance and how its sustainability initiatives were contributing to its financial performance. The narrative of this call was very similar to the narrative of the company's first "integrated report," which was issued in 2012 and presented the company's sustainability initiatives in the context of its operating and financial performance. However, the contents of the "ESG Briefing" and those of its traditional quarterly earnings conference calls were very different-and so were the audiences. Whereas the quarterly call was attended mainly by sell side analysts-and the words "sustainability" or "sustainable" failed to receive a single mention-the ESG briefing was delivered to an investor audience made up exclusively of the "buy side."

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45583

Abstract—Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms' substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firms' switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices, and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45581

Abstract—Reaching for yield-the propensity to buy riskier assets in order to achieve higher yields-is believed to be an important factor contributing to the credit cycle. This paper analyses this phenomenon in the corporate bond market. Specifically, we show evidence for reaching for yield among insurance companies, the largest institutional holders of corporate bonds. Insurance companies have capital requirements tied to the credit ratings of their investments. Conditional on ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior appears to be related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for the insurance firms for which regulatory capital requirements are more binding. The results hold both at issuance and for trading in the secondary market and are robust to a series of bond and issuer controls, including issuer fixed effects as well as liquidity and duration. Comparison of the ex-post performance of bonds acquired by insurance companies does not show outperformance but higher volatility of realized returns.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45580

Abstract—No abstract available.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45603