Jeffrey Meli

Research

Publications

  • The Economics of ESG Governance And Disclosure
    • The Texas Review of Litigation, 2024
    • Attempts to incorporate Environmental, Social, and Governance (ESG) factors in corporate governance and capital-raising suffer from a lack of consensus on the definition and goals of ESG. We propose an ESG taxonomy, with four principle forms, defined by their intended beneficiary and means of enforcement. We analyze whether each form is economically workable under existing investor-oriented regimes of corporate governance and securities disclosure enforcement. ESG that is intended to improve shareholder value maximization is likely to be effective, as its goal is fully aligned with that of the existing enforcement and disclosure regime. However, various aspects of the current regime present significant hurdles to forms of ESG which seek to advance pro-social objectives that may be in conflict with shareholder maximization.
  • The Promise of Diversity, Inclusion, and Punishment in Corporate Governance
    • The Texas Law Review, 2021, 99, 1387 - 1422
    • Motivated in part by a desire to change corporate behavior in a more pro-social direction, a number of governance inclusion mandates have been proposed that would require a corporate board to include diverse individuals or representatives of a constituency. This article applies the economic insights of the Coase theorem to determine if and how such mandates will affect corporate activities. The boardroom is a “Coasian bubble” in which the abilities to bargain and contract are greatly enhanced; inclusion of interests in the boardroom allows those interests to be taken into account. Inclusion also results in some transfer of corporate surplus from shareholders to the newly included. This implies that corporate behavior may not change since all those represented in the boardroom have incentives to maximize corporate surplus. Exceptions are where inclusion enables efficient contracting that was otherwise infeasible or if the included group has significant interests that are subject to corporate externalities. The latter channel is most likely to result in more pro-social corporate behavior since such interests represent significant “skin in the game” for avoiding corporate malfeasance. Skin in the game can also be manufactured through ex post liability, such as by making a represented constituency liable for corporate failures or misbehavior; further, such liability may be necessary so that incentives are not degraded where the constituency receives benefits that are not in the nature of residual claims. Viewed through this lens, constituency mandates, in which directors are accountable to groups with significant interests, show some promise for promoting socially beneficial corporate behavior; diversity mandates, in which diverse but atomistic directors generally lack such accountability (at least as proposed), do not.
    • Featured in the Harvard Law School Corporate Governance Blog.
  • Credit ETFs in Mutual Funds and Corporate Bond Liquidity
    • Financial Markets, Institutions, and Instruments, 2023, 32 89 - 114
    • We show that high yield (HY) mutual funds own and trade ETFs to manage liquidity needs driven by fund flows, whereas investment grade (IG) funds do not. The use of ETFs by HY mutual funds to manage liquidity shifts some trading away from bonds and into ETFs, which reduces the liquidity of the underlying bonds. This substitution effect outweighs the better-understood inclusion effect, whereby bond liquidity benefits from increased ETF ownership, such that the net effect of ETFs is to reduce HY liquidity. In IG, the substitution effect is not significant and ETFs result in increased bond liquidity.
  • Quantitative Management of Credit Portfolios
    • The Journal of Fixed Income 30th Anniversary Special Issue 2022, 32 ( 2) 93 - 141
    • Quantitative techniques have long been used to measure and control risk in credit portfolios. More recently, interest has grown in a systematic approach to generating alpha in credit, with the promise of improved scalability and lower management expenses. We review several signals that seek alpha in credit, including value, equity momentum, equity short interest, and post-earnings announcement drift, and demonstrate that such strategies can effectively complement a more fundamental approach. We also show how systematic strategies can exploit index inefficiencies, such as the overselling and subsequent recovery of fallen angels. Company ratings on environmental, social, and governance issues have become central to portfolio management, and we discuss various aspects of their use: how to measure their performance, how to glean alpha signals from them, and how to most effectively constrain them. Finally, liquidity and transaction costs have always been key concerns for credit portfolio managers. We discuss how the liquidity landscape has evolved with the rise in exchange-traded funds and portfolio trading in corporate bonds. Putting it all together, we discuss portfolio construction techniques that can optimally combine signals and integrate transaction costs.

Working Papers

  • Portfolio Trading in Corporate Bond Markets
    • Portfolio trading, a recent innovation in the corporate bond market, involves trading a basket of bonds as a single piece of risk with a single market-maker. We develop an algorithm to identify portfolio trades in TRACE, and show that portfolio trading increased from 1% of total investment grade corporate bond volumes in 2018 to 7% in 2021. The protocol reduces execution costs by over 40%, with the largest benefits accruing to the least liquid bonds. We link these gains to the ETF ecosystem; portfolios that are more easily priced and hedged using ETFs have lower transaction costs.
  • Financial Segregation and the Changing Nature of Shocks: Evidence from the International Repo Market
    • Starting with the US regulation of foreign owned banks introduced in 2016, post-crisis banking reforms have increased financial segregation by restricting the mobility of bank capital across jurisdictions. Using data from international funding markets, we demonstrate how this has changed the propagation of shocks. When unconstrained, capital flow between jurisdictions was a source of global contagion, but acted as a buffer that reduced the severity of shocks and their spill-overs to adjacent markets. Segregating capital reduces or eliminates global contagion, but leads to more frequent and severe dislocations, and greater within-jurisdiction disruptions.
  • Wage Signaling, Salary History Bans, and Equality
    • We develop a model of employee mobility and wage formation suitable for analyzing labor market interventions that target wages and discrimination. By augmenting the standard asymmetric learning model with costly effort, such that wages are necessary for production, wages become fully informative of employee ability rather than merely products of public signals and employer competition for workers, as in prior models. When salary disclosure is allowed, strategies designed to mask employee quality, commonly seen in standard models, are untenable; instead, the equilibrium has symmetric learning, optimal employee assignment, and efficient production. When salary disclosure is prohibited – actual policy in many jurisdictions – the equilibrium reverts to asymmetric learning, with strategic under-assignment due to manipulation of noisy signals. Equal pay mandates that restrict intra-title wage variation, as may result from anti-discrimination law, prevent firms from fully utilizing employee skill. In the presence of discrimination, both salary history bans and equal pay mandates may result in reduced wage gaps, though at the expense of reduced production efficiency and returns to skill.
  • Trade Protocols, Transparency, and Liquidity – Theory and Evidence from the European Corporate Bond Market
    • We develop a model of market making with an endogenous choice of trade protocols, and demonstrate that with a high inventory cost dealers engage in both principal and agency trading. Transparency shifts more transactions into the (uncertain) agency protocol, and increases the bid-offer of principal trades with a sufficiently low probability of agency execution. We test these predictions with a novel database of European corporate bond transactions, exploiting two sources of exogenous variation in transparency. Transparency increases transaction costs for large trades and trades in older bonds, which are more difficult to “match”, and vice-versa.

Conferences and Presentations