Adair Morse

Information Disclosure, Cognitive Biases and Payday Borrowing

If people face cognitive limitations or biases that lead to financial mistakes, what are possible ways lawmakers can help? One approach is to remove the option of the bad decision; another approach is to increase financial education such that individuals can reason through choices when they arise. A third, less discussed, approach is to mandate disclosure of information in a form that enables people to overcome limitations or biases at the point of the decision. This third approach is the topic of this paper. We study whether and what information can be disclosed to payday loan borrowers to lower their use of high-cost debt via a field experiment at a national chain of payday lenders. We find that information that helps people think less narrowly (over time) about the cost of payday borrowing, and in particular information that reinforces the adding-up effect over pay cycles of the dollar fees incurred on a payday loan, reduces the take-up of payday loans by about 10 percent in a 4 month-window following exposure to the new information. Overall, our results suggest that consumer information regulations based on a deeper understanding of cognitive biases might be an effective policy tool when it comes to regulating payday borrowing, and possibly other financial and non-financial products.

What do High-Interest Borrowers do with Their Tax Rebate?

Building on prior literature that constrained individuals consume the most out of a tax rebate, we study the tradeoffs high interest borrowers face when they received their 2008 tax stimulus checks. We find a persistent decline in payday borrowing in the pay cycles that follow the receipt of the tax rebate. The reduction in borrowing is a significant fraction of the mean outstanding loan (12%) and appears fairly persistent over the time, but is moderate in dollar magnitude (about

Sovereign Wealth Fund Portfolios

35) relative to the size of the rebate check (

Consumer Lending Discrimination in the FinTech Era

600 per person). In trying to reconcile this finding with the cost of not retiring expensive payday debt, we find substantial heterogeneity across borrowers. Among individuals that we classify as temptation spenders (e.g. those that use 400% APR loans to buy electronic goods or go on vacation), we find no reduction in payday borrowing after the tax rebate is issued, but this group represents only a small fraction of payday borrowers. A second group for which we find no debt retirement post-check is the set of borrowers that appear to use what should be short-term payday loans as a long-term financing solution. We infer that the marginal use of the tax rebate for this group was to deal with regular monthly obligations, such as paying down late utility bills or making rent payments.

Executive Lawyers: Gatekeepers or Totems of Governance?

Using a novel, hand-collected dataset of Sovereign Wealth Fund (SWF) investments in public equities, private firms, and real estate, we establish what SWF portfolios look like. SWF allocations are balanced across risky asset classes, very home-region biased, and very biased toward certain industries, in particular, toward finance (owning 4.8% of world equity) and transportation, energy and telecommunication. SWFs invest actively (with control rights) in both public and private sectors, but mainly in these industries in their home regions. We use these allocations to understand better the objectives that drive SWF investment decisions. We find evidence for financial portfolio investor benchmarking and for hedging of income covariance risk. We introduce and test an industrial planning hypothesis as an alternative objective and find this has considerable explanatory power. We find that both measures to capture financial portfolio and industrial planning objectives together explain 14.4% of SWF portfolio variation. Of this, industrial planning accounts for 45%. There is significant variation in the power of industrial planning objectives across SWFs revealing important heterogeneity in this investor class. Industrial planning helps to explain active ownership, predicting higher ownership stakes.

Compensation Rigging by Powerful CEOs: A Reply and Cross-Sectional Evidence ∗

Discrimination in lending can occur either in face-to-face decisions or in algorithmic scoring. We provide a workable interpretation of the courts’ legitimate-business-necessity defense of statistical discrimination. We then estimate the extent of racial/ethnic discrimination in the largest consumer-lending market using an identification afforded by the pricing of mortgage credit risk by Fannie Mae and Freddie Mac. We find that lenders charge Latinx/African-American borrowers 7.9 and 3.6 basis points more for purchase and refinance mortgages respectively, costing them

Who Blows the Whistle on Corporate Fraud

765M in aggregate per year in extra interest. FinTech algorithms also discriminate, but 40% less than face-to-face lenders. These results are consistent with both FinTech and non-FinTech lenders extracting monopoly rents in weaker competitive environments or profiling borrowers on low-shopping behavior. Such strategic pricing is not illegal per se, but under the law, it cannot result in discrimination. The lower levels of price discrimination by algorithms suggests that removing face-to-face interactions can reduce discrimination. Further silver linings emerge in the FinTech era: (1) Discrimination is declining; algorithmic lending may have increased competition or encouraged more shopping with the ease of platform applications. (2) We find that 0.74-1.3 million minority applications were rejected between 2009 and 2015 due to discrimination; however, FinTechs do not discriminate in loan approval.

Are Incentive Contracts Rigged by Powerful CEOs

We study the effectiveness of internal gatekeepers and then ask whether equity incentives divert the attention of corporate lawyers from gatekeeping. We find that executive gatekeepers reduce compliance failures (AAERS and insider trading profits) to negligible levels and decrease securities fraud and uncaught accounting fraud by 43% and 9% respectively. A general counsel fixed effect explains 12% of the variation in insider trading profits, 7% in AAERs, and 6% in class action suits, over and above firm, year, and CEO fixed effects. Then, using the assumption that gatekeepers hired from law firms are initially less responsive to incentive pay as compared to those hired from other corporations for identification, we find that equity incentives given to gatekeepers unwind some governance improvements. A one standard deviation increase in gatekeeper’s compensation delta unwinds 82% of the prevention of securities fraud. Gatekeepers do not get diverted, however, from frauds associated with regulatory compliance. We conclude with an alternative interpretation of our design that these gatekeepers-in-residence may be hired as value-creators, but totems of governance. JEL Classification: G32, G34, J33, K22, M52

Payday Lenders: Heroes or Villains?

Wan (2013) argues that the statistical inferences in our Journal of Finance (2011) paper are not robust, as we do not prove that it is powerful CEOs that rig incentive contracts. Wan makes the theoretical claim that the rigging results are consistent with ex-post optimal re-contracting. However, optimal re-contracting cannot explain the loss in firm value from contract switching we show in the paper. Nor do we know of a theory that would predict that ex-post realignment could be tested using our contract switching term in the wage function, like Wan does. On the empirical front, Wans critique has at least three flaws. First, his standardized performance measures — different than ours — result in accounting returns being 14 percentage points higher than stock returns. Consequently, switching between measures, necessary for identification, is infrequent and outlier-based, not surprisingly delivering regression estimates different from ours. Second, he interprets selectively among insignificant coefficients to make his claims. Third, regardless of interpretation, basic mathematics casts doubt on the premise of his estimation strategy. Wan makes one valid point: our original work could have provided more extensive cross-sectional empirical support for our rigging claims. We take this opportunity to present new cross-sectional (between-firm) evidence and conclude even more strongly that powerful CEOs sway boards to load their incentive pay on more favorably performing measures.