Karthik Balakrishnan’s research while affiliated with Rice University and other places

This study examines how the market share of dark venues changes at earnings announcements. Our analysis shows a statistically significant increase in dark market share in the weeks prior to, during, and following the earnings announcement. We also predict and find evidence that increases in dark market share around earnings announcements are higher for firms with high-quality accounting information. In addition, we find a positive relation between the change in dark market share and the speed of resolution of investor disagreement—a key dimension of informational efficiency, which suggests that dark trading is associated with an improvement in market quality. How market fragmentation changes around news events, the role accounting information plays in market fragmentation, and how changes in market fragmentation relate to market quality can help provide insights to securities regulators. JEL Classifications: G12; G14; D47; M41.

We study the economic consequences of mandates that require bank auditors to report to bank regulators. Based on survey responses from the European Central Bank and all 28 national bank regulators within the European Union and a review of national banking regulations, we create a novel dataset on these mandates. Exploiting the cross-sectional and time-series variation in these mandates, we find evidence that auditor reporting to bank regulators reduces bank riskiness, as measured by counterparty risk and credit spreads. We also observe a decline in problem loans and risk-weighted assets, as well as improvements in timeliness of loan loss provisions. Additional analyses suggest that mandated auditor reporting increases the effectiveness of supervisory and monitoring efforts and improves market discipline of banks. However, mandated auditor reporting comes with costs: it reduces future lending growth, risky lending, and profitability, and increases audit fees paid by shareholders.

Does enhancing banks' information sets and understanding of credit risks improve loan loss recognition? We study this question using a global dataset of staggered initiations and coverage increases of public credit registries (PCRs). Mandated by national regulators, PCRs collect borrower and loan information from lenders and share it with the banks in the financial system. This setting represents a significant improvement in banks' assessment of loss events. We find that PCR initiations and coverage reforms enhance the timeliness of banks' loan loss recognition—the extent to which loan loss provisions capture subsequent nonperforming loans. The effects are greater when PCRs distribute more information and are not driven by changes in borrower quality or supervisory stringency. Overall, these inferences are consistent with improvements in banks' information sets leading to better provisioning decisions. JEL Classifications: D82; G21; G28; G32; M41.

We explore a large sample of analysts’ estimates of the cost of equity capital (CoE) to evaluate their usefulness as expected return proxies (ERP). We find that the CoE estimates are significantly related to a firm’s beta, size, book-to-market ratio, leverage, and idiosyncratic volatility but not other risk proxies. Even after controlling for the popular return predictors, the CoE estimates incrementally predict future stock returns. This predictive ability is better explained as the CoE estimates containing ERP information rather than reflecting stock mispricing. When evaluated against traditional ERPs, including the implied costs of capital, the CoE estimates are found to be the least noisy. Finally, we document CoE responses around earnings announcements, demonstrating their usefulness to study discount-rate reactions of market participants. We conclude that analysts’ CoE estimates are meaningful ERPs that can be fruitfully employed in a variety of asset pricing contexts.

This paper documents how analyst recommendations are related to periods of bubbles. We find a strong positive relation between the concentration in analyst buy recommendations and bubble continuation in two settings. First, we show a positive association between the concentration in buy recommendations and the tech bubble; the crash was associated with changes in buy recommendation concentration. Second, in an out-of-sample analysis of firms in multiple industries from 1994 to 2009, we show that analyst buy recommendation concentration predicts future return patterns that exhibit characteristics of a rational speculative bubble. While the evidence is not sufficient to conclude that analyst buy recommendations are the causal factor that perpetuates the mispricing, our findings suggest that, at a minimum, analysts do not act proactively to correct this form of mispricing in a timely manner. JEL Classifications: G10; G12; G14; G20.

We employ the European Central Bank’s Loan-level Reporting Initiative as a shock to banks’ asset disclosures. We find that after the disclosure regulation, treatment banks raise more capital at cheaper rates and increase lending. Using novel survey data on small businesses, we also document that, in regimes with heightened bank disclosures, borrowers receive greater funding, conditional on their demand for credit. Furthermore, companies whose relationship banks provide asset disclosures start to borrow and invest more relative to firms from the same country and industry. Collectively, our inferences suggest that asset disclosures alleviate the capital market frictions that banks face and allow them to supply more credit to the real economy.