Topic:     The Distribution Side of Insurance Markets

              Sentiment, Investor Sophistication, and Asset Bubble

              Startup Catering to Venture Capitalists

              Is Consumption Tax Policy Effective at ZLB? New Evidence from the Real Cost Channel

Speaker: Jiaxing Tian, Assistant Professor in Finance at CUHKSZ

               Zhongchao Yang, Assistant Professor in Finance at WHU

               Xiyue Li, Assistant Professor in Finance at CUHKSZ

               He Nie, Associate Professor in Finance at WHU

Time: November 16, 2024, 10:00

Venue: EMS 237

10:00 – 10:30 Paper I: The Distribution Side of Insurance Markets, by Jiaxing Tian, Assistant Professor in Finance at CUHKSZ

Abstract: This paper studies the impact of distribution channels on insurance product adoption. Specifically, we exploit novel policy-level data provided by one of the largest life insurers in China, where we observe detailed information on individual policy characteristics, investor characteristics, and sales channels. We exploit a regulatory change in 2014 that requires at least 20% of the contracts sold by bank insurance agents in each quarter to be qualified long-term insurance products. Exploiting a discontinuity-in-slope design, we show that bank agents falling below their target qualified ratios in the first two months of a quarter make up for the shortfall in the third month; conversely, bank agents that have exceeded their target ratios in the first two months do not alter their behavior in the last month of the quarter. This shift in qualified ratio in the last month of the quarter is entirely due to a product-composition change -- switching from short-term unqualified life insurance products to long-term qualified annuity products. We further show that this switch is not achieved by changing the relative pricing of products or client compositions.

10:30 – 11:00 Paper II, Sentiment, Investor Sophistication, and Asset Bubble, by Zhongchao Yang, Assistant Professor in Finance at WHU.

Abstract: Despite their informational advantages, financial institutions are often found to divest toxic assets too slowly, incurring massive losses during crises. We study the relationship between investor sophistication and investor performance in an asset bubble model with market sentiment. Compared to unsophisticated traders, sophisticated traders have information precision advantage and information speed advantage. The information precision advantage reinforces sentiment's role as a potent coordination force. When sentiment surpasses a threshold, sophisticated traders tend to be more optimistic, prolong the bubble-holding duration, and suffer greater loss. Furthermore, their information speed advantage yields a divestment pattern characterized by delayed but intense selling. We show that sophisticated traders are more likely to fuel asset bubbles when underlying asset quality is higher and restrain them when quality is lower.

11:00 – 11:30 Paper III, Startup Catering to Venture Capitalists by Xiyue Li, Assistant Professor in Finance at CUHKSZ

Abstract: I show that information frictions in valuation can lead startups to select projects that align with the expertise of potential venture capital (VC) investors, a strategy I refer to as catering. First, I build a theoretical model where a startup trades off project quality with the informational benefits of catering. The startup selects catering when alternative information sources are limited or VC investors demonstrate proficiency in valuing projects close to their expertise. Second, using textual data from patent applications, I define catering projects as patent applications that deviate from the founders' experience toward VC's expertise. Consistent with model predictions, catering applications are more prevalent when patent examination is slow or VCs utilize past data to screen new deals. Catering applications are 9.3% less likely to get patent approval, suggesting low project quality. Overall, this paper shows that specialized financial intermediaries, such as VC, can broadly shape new technology developed by firms outside their portfolios.(I show that information frictions in valuation can lead startups to select projects that align with the expertise of potential venture capital (VC) investors, a strategy I refer to as catering. First, I build a theoretical model where a startup trades off project quality with the informational benefits of catering. The startup selects catering when alternative information sources are limited or VC investors demonstrate proficiency in valuing projects close to their expertise. Second, using textual data from patent applications, I define catering projects as patent applications that deviate from the founders' experience toward VC's expertise. Consistent with model predictions, catering applications are more prevalent when patent examination is slow or VCs utilize past data to screen new deals. Catering applications are 9.3% less likely to get patent approval, suggesting low project quality. Overall, this paper shows that specialized financial intermediaries, such as VC, can broadly shape new technology developed by firms outside their portfolios.

11:30 – 12:00 Paper IV, Is Consumption Tax Policy Effective at ZLB? New Evidence from the Real Cost Channel, by He Nie, Associate Professor in Finance at WHU

Abstract: In this paper, we extend a standard medium-scale New Keynesian model and include the Real Cost Channel (RCC), analyzing its impact on consumption tax effects. We show that consumption tax policy exhibits an inherent `go big or go home" feature, moderated by the RCC asymmetrically. At the ZLB, modest tax cuts fail to shorten the ZLB duration; the RCC can diminish the long-run present-value output gap multiplier from 4.42 to 4.08. This reduction is more pronounced during ZLB periods than in non-ZLB scenarios. Conversely, large tax cuts shorten ZLB duration by leveraging inflation expectations but do not ensure full escape, while the RCC's role amplifies the long-run present-value multiplier. We also show that while large initial reductions in consumption taxes are stimulating, more persistent policies lead to significant declines in output multipliers and exacerbate welfare losses, even as the RCC's role remains robust.