Paper Spotlight: Rethinking the Use of Credit Ratings in Capital Regulations: Evidence From the Insurance Industry

Stanislava Nikolova

Kathleen Weiss Hanley

One major lesson from the 2008-09 financial crisis that subsequently shaped in part the regulatory framework that emerged in the last decade was that downgrades of securities occurring in an interconnected financial system create a need for capital relief for regulated entities. This happens because banks’ and insurers’ capital requirements are based on credit ratings. The question is what kind of short-term and long-term incentives arise from such relief programs. In “Rethinking the Use of Credit Ratings in Capital Regulations: Evidence From the Insurance Industry,” Kathleen Weiss Hanley and Stanislava Nikolova examine a change in how insurance regulators assess capital adequacy for certain mortgage-backed securities (RMBS and CMBS) in the wake of the 2008-09 financial crisis. They find that the new regulations result in $17.6 billion of required and statutory capital savings. Insurers change their investment behavior as a result of the relief, perhaps an unintended consequence of the new capital regulations. First, sales of distressed RMBS/CMBS and gains trading in corporate bonds are less likely, and insurers with larger regulatory capital savings are less likely to engage in these asset-sale practices. Second, insurers are also less likely to raise external capital. Third, the average rating of insurers’ secondary market RMBS/CMBS purchases worsens and the proportion of low-rated RMBS/CMBS purchased increases. Even more interesting is the finding that insurers whose portfolio fared worse during the financial crisis were more likely to purchase low-rated assets. Overall, these findings point toward some very important consequences of the regulatory reform: there were short-term benefits, but it may have incentivized risk taking and left some insurers excessively exposed to market risk.

Spotlight by Andrew Ellul
Photos courtesy of Kathleen Weiss Hanley & Stanislava Nikolova

Camelia Kuhnen Joining the RCFS Team

Camelia Kuhnen

We are pleased to announce that Camelia Kuhnen is joining RCFS as an editor. Camelia is a professor of finance and Sarah Graham Kenan distinguished scholar at UNC Kenan-Flagler and a faculty research associate at NBER. She is an expert in household finance, neuroeconomics, and corporate finance. She is currently an associate editor at the Journal of Finance, the Review of Financial Studies, and Management Science. Camelia previously served as president of the Society for Neuroeconomics and as an associate editor of RCFS. Her first day will be October 15, 2020.

Code Sharing Policy

The Review of Corporate Financial Studies (RCFS) is enacting a Code Sharing Policy for papers accepted for publication, which will be effective on October 1, 2020. The policy is available here. This policy reflects the commitment of the RCFS to the highest standards of quality, as we believe that the policy will help improve the reproducibility and replicability of published research and by this will support the credibility and impact of this research. The policy does not impose much of a burden on authors. As the policy makes clear, at the moment, data sharing is encouraged but not required. We think that moving forward with a data sharing policy is more complicated and requires coordination with other leading journals. We are conducting conversations along these lines and will continue to do so under our commitment to the highest standards of quality for academic research in finance.

Paper Spotlight: How Did COVID-19 Affect Firms’ Access to Public Capital Markets?

Michael Halling

Jin Yu

Josef Zechner









Sharp recessions and prolonged market stress periods are accompanied by drying up of equity and corporate bond issues, a big challenge for firms because the need for capital is very high during such periods. Disentangling supply-driven from demand-driven reasons is very problematic. In this paper, Michael Halling, Jin Yu, and Josef Zechner use the ongoing COVID-19 pandemic, a truly exogenous demand shock, to investigate the extent to which financial markets provide external debt and equity capital to the corporate sector. The paper starts with a surprising result: corporate bond issues increased substantially since the onset of the pandemic crisis both for bonds rated A or higher as well as for bonds rated BBB or lower. Another surprising result: firms chose longer maturities during the crisis, in contrast to earlier results reported in the literature that suggest a tendency to issue shorter-term debt during crises. The paper also identifies firm characteristics that determine the cross-sectional differences in firms’ access to financial markets, in terms of maturities, spreads, and ratings. This paper is coming soon to advance access.

Spotlight by Andrew Ellul
Photos courtesy of Michael Halling, Jin Yu, and Josef Zechner

Paper Spotlight: Feverish Stock Price Reactions to COVID-19

Alexander F. Wagner

Stefano Ramelli

The market reactions to the 2019 novel Coronavirus event, a truly exogenous shock, can help our understanding of how real economic shocks and financial policies drive firm value. In “Feverish Stock Price Reactions to COVID-19,” Stefano Ramelli and Alexander F. Wagner find strong causal evidence for the role of international trade and global value chains for corporate value. Initially, internationally-oriented firms, especially those more exposed to China, underperformed. As the virus spread to Europe and the U.S., corporate debt and cash holdings emerged as important value drivers, relevant even after the Fed intervened in the bond market. Interestingly, the content and tone of analysts’ conference calls mirror these developments over time. Overall, the results illustrate how the anticipated real effects from the health crisis, a rare disaster, were amplified through financial channels. This paper is coming soon to advance access.

Spotlight by Andrew Ellul
Photos courtesy of Stefano Ramelli & Alexander F. Wagner

Statement of the SFS Council

The Society of Financial Studies Council believes that we cannot remain silent about the continued acts of racism that exist in our society. We acknowledge the numerous voices of the peaceful protesters and are determined to not let this moment pass without contributing to a changed society. In particular, the future of a robust financial system lies on the path of justice and equity. We are actively investigating ways to participate.