Macro Roundup

Andreas Fagereng, Magne Mogstad, Marte Rønning, "Why do wealthy parents have wealthy children?∗," University Of Chicago, June 2020, https://www.journals.uchicago.edu/doi/abs/10.1086/712446

Study looks at Korean-born children who were adopted at infancy by Norwegian parents (the distribution to parents was effectively random) thus removing any genetic component for lack of future/ or future successes. They look at the parents and then the kids outcomes in terms of net wealth, and financial wealth (they use the parents wealth btw 1994-1996 and the kids wealth btw 2012-2014)

Primary findings, “…We use the quasi-random assignment of the Korean-Norwegian adoptees to estimate the causal effects from a child being raised in one type of family versus another. Our findings show that family background matters significantly, even after removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees’ stock market participation and portfolio risk are increasing in the financial risk taking of their adoptive parents….”
However they also look at biological children of parents where being genetically related to rich parents has a significant impact, "...To help interpret the economic significance of family background,we compare the intergenerational associations in wealth for adoptees to those for non-adopted children. This enables us to compare the predictive influence of parental wealth when there is and is not a genetic link between children and the parents raising them. We find that the intergenerational association in wealth is more than twice as large for parents and own birth children as compared to parents and adoptees..."

Overall findings, “…Strong intergenerational associations in wealth have fueled a longstanding debate over why children of wealthy parents tend to be well off themselves. We investigate the role of family background in determining children’s wealth accumulation and investor behavior as adults. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on disaggregated wealth portfolios and socio-economic characteristics. The mechanism by which these Korean Norwegian adoptees were assigned to adoptive families is known and effectively random. We use the quasi-random assignment to estimate the causal effects from an adoptee being raised in one type of family versus another. Our findings show that family background matters significantly for children’s accumulation of wealth and investor behavior as adults, even when removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees’ stock market participation and portfolio risk are increasing in the financial risk taking of their adoptive parents. The detailed nature of our data allows us to explore mechanisms, assess the generalizability of the lessons from adoptees, and compare our findings to results from behavioral genetics decompositions…. Figure 3 summarizes the dependence in net wealth across generations by displaying the relationship between parent and child ranks in the net wealth distributions.6 Panel A considers the non-adoptees, whereas panel B shows results for the Korean-Norwegian adoptees. We measure the percentile rank of parents based on their positions in the entire distribution of parental wealth, pooling parents of the non-adoptees and the Korean-Norwegian adoptees. Similarly, we define children’s percentile ranks based on their positions in the entire distribution of child wealth, including both the non-adoptees and adoptees. To adjust for differences in age across children and parents, we regress their wealth on a full set of indicator variables for child and parent birth years, and use the residuals from these regressions to measure child and parent ranks. Each dot represents the mean child rank (measured on the y-axis) for a given parental rank (measured on the x-axis). The solid thick line comes from a local linear regression of child wealth rank on parental wealth rank, the solid thin line is the estimated slope coefficient from a linear regression of child rank on parent rank, and the dashed line is the 45 degree line (representing perfect dependence). The linear rank correlations are 0.24 and 0.16 for the samples of non-adoptees and adoptees, respectively. This means that, on average, a 10 percentile increase in parent net wealth is associated with a 2.4 percentile increase in a biological child’s net wealth and a 1.6 percentile increase in an adoptees’ net wealth. The conditional expectation of child net wealth given parent net wealth is relatively linear in percentile ranks across most of the net wealth distribution. At the top of the net wealth distribution, however, the dependence is stronger than what is predicted from a linear regression of child rank on parent rank…”

Economist Staff, “Companies have raised more capital in 2020 than ever before,”The Economist, December 9, 2020, https://www.economist.com/business/2020/12/09/companies-have-raised-more-capital-in-2020-than-ever-before

Companies have raised more capital in 2020 than ever before

IN MARCH THE corporate world found itself staring into the abyss, recalls Susie Scher. From her perch overseeing global capital markets at Goldman Sachs, a bank, she witnessed firms scrambling for money to keep going as the wheels of commerce ground to a halt amid the pandemic. Many investors panicked. Surely, the thinking went, public markets would freeze in the frigid fog of covid-19 uncertainty—and then stay frozen.

Instead, within weeks they began to thaw, then simmer, kindled by trillions of dollars in monetary and fiscal stimulus from governments desperate to avert an economic nuclear winter. In the past few months they have turned boiling hot.

Initial public offerings (IPOs), too, are flirting with all-time highs, as startups hope to cash in on rich valuations lest stockmarkets lose their frothiness, and venture capitalists (VCs) patience with loss-making business models. VCs still plough three times as much into American startup stars than public investors do. But proceeds from listings are now growing faster than private funding rounds (see chart 2). The boom is global (see chart 3). On December 2nd JD Health, a Chinese online pharmacy, raked in $3.5bn in Hong Kong. A week later DoorDash, an American food-delivery darling, and Airbnb, a home-rental platform, both more or less matched it in New York.

The original spark that lit capital markets on fire was the $6.25bn in debt and equity that Carnival Cruise Lines secured in April, remembers Carlos Hernandez of JPMorgan Chase, a bank. Investors reasoned that cruises will one day sail again—by which time some of Carnival’s flimsier rivals will have sunk. Other dominant firms have benefited from this logic. Boeing, part of a planemaking duopoly, has sold $25bn in bonds this year, even as its bestselling 737 MAX jetliner has remained on the ground and the near-term future of travel up in the air. Many Chinese companies have taken to issuing perpetual bonds, which are never redeemed but pay interest for ever, to repair their balance-sheets.

Even cheap debt, of course, must be rolled over and, perpetuities aside, eventually paid back. With stockmarket valuations propped up by loose monetary policy, and only a slim prospect of tightening, many firms opted to shore up their balance-sheets with new share issues. Danaher, a high-rolling industrial conglomerate, raised over $1.5bn by selling new stock just after its share price returned to its pre-pandemic highs in May; it has risen by 39% since. On December 8th Tesla, an electric-car maker whose market value has grown eight-fold this year, to $616bn, said it plans to issue $5bn-worth of shares.

With shareholder payouts trimmed or suspended until the covid fog lifts, the cash held by the world’s 3,000 most valuable listed non-financial firms has exploded to $7.6trn, from $5.7trn last year (see chart 4). Even if you exclude America’s abnormally cash-rich technology giants—Apple, Microsoft, Amazon, Alphabet and Facebook—corporate balance-sheets are brimming with liquidity.

It is still too early to tell what firms will do with all that cash. The merger market is showing signs of life, though mostly as deals put on ice during the pandemic are being revived. Many companies will content themselves with maintaining liquidity, at least until a covid-19 vaccine becomes more widely available.

Startups, for their part, will use IPO proceeds to blitzscale their way to profitability. The pandemic has made business models that might not have matured for years, such as digital health, suddenly viable. Many will fail. But for now giddy investors are pouring money into any firm whose IPO prospectus features the words “digital”, “cloud” or “health”. Headier still, “special purpose acquisition companies”, which go public with nothing but a promise to merge with a sexy startup later on, and which have raised $70bn in 2020, mostly on Wall Street, are shattering previous records.

Markets seem no more discerning in mainland China, where proceeds from listings hit $63bn, the most since 2010. Hong Kong added another $46bn. Shanghai’s STAR Market, a year-old technology board, this week welcomed its 200th member, bringing its IPO haul to $44bn. In September demand for shares to be traded on the Hong Kong Stock Exchange by Nongfu Spring, a water-bottler, outstripped supply by 1,148 times. Even the authorities’ last-minute suspension of Ant Group’s record-breaking $40bn IPO in Hong Kong and Shanghai, after the fintech titan’s co-founder annoyed regulators, may not frighten other listers. And so long as geopolitical tensions between America and China persist, more Chinese firms with an American stock ticker may avail themselves of a Hong Kong one, observes Julien Begasse de Dhaem of Morgan Stanley, a bank.

For now, capital is likely to keep flowing. Mr Hernandez says his bank’s pipeline of IPOs looks “the most robust in years”. The ten-year Treasury yield is below 1% and the spreads between American government and corporate bonds have narrowed to pre-pandemic levels. As a result, even riskier firms’ paper yields less than 5%, according to JPMorgan Chase. Investors expecting meaningful returns are therefore eyeing stocks. For the pandemic’s corporate winners, the choice between cheap debt and cheap equity is a win-win.

Record cash on hand, “…,the cash held by the world’s 3,000 most valuable listed non-financial firms has exploded to $7.6trn, from $5.7trn last year (see chart 4).Even if you exclude America’s abnormally cash-rich technology giants—Apple, Microsoft, Amazon, Alphabet and Facebook—corporate balance-sheets are brimming with liquidity….

Factoids on record capital formation in 2020, “…. According to Refinitiv, a data provider,this year the world’s non-financial firms have raised an eye-popping $3.6trn in capital from public investors(see chart 1). Issuance of both investment-grade and riskier junk bonds set records, of $2.4trn and $426bn, respectively. So did the $538bn in secondary stock sales by listed stalwarts, which leapt by 70% from last year, reversing a recent trend to buy back shares rather than issue new ones. Initial public offerings (IPOs), too, are flirting with all-time highs, as startups hope to cash in on rich valuations lest stockmarkets lose their frothiness, and venture capitalists (VCs) patience with loss-making business models. VCs still plough three times as much into American startup stars than public investors do. But proceeds from listings are now growing faster than private funding rounds (see chart 2).The boom is global (see chart 3)….”