Research Program I: Investor Beliefs, Preferences, Limits to Arbitrage, and Asset Prices
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Abstract and notes
Investors appear to group companies based on their stock-price levels. This can cause excess-comovement.
We find that, shortly after a stock conducts a 2-for-1 split, the stock starts co-moving more with lower-priced stocks and less with higher-priced stocks. This shift occurs after the effective date of the split and not on (or before) the announcement date. Our results suggest that investors group companies based on stock-price levels and that flows across categories induce comovement beyond fundamentals.
Please check out the SAS code under "Code and Data" to reproduce our main results.
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Abstract and notes
Companies operating in less popular countries (among Americans) trade at a substantial discount in the US. Country popularity also affects foreign direct investment and cross-border mergers.
I provide evidence that a country’s popularity among Americans (as measured by Gallup Polls) affects US investors’ demand for securities tied to that country and causes prices to deviate from fundamentals. Country popularity also positively associates with the intensity of US cross-border M&A activity.
If you are interested in the country popularity data and your institution subscribes to the Gallup Polls or the iPoll Databank, please click here.
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Abstract and notes
Investors appear to treat IPOs like lotteries. This can cause temporary IPO overpricing and poor long-run performance.
We find evidence that IPOs with greater upside potential have significantly higher first-day returns; these IPOs also have noticeably lower long-term returns.
Please check out the SAS code under "Code and Data" to reproduce our main results.
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Abstract and notes
Issuing financial disclosure documents that are difficult to read can cause firms to trade at a substantial discount.
Using copy-editing software that measures writing faults affecting readability, we provide evidence that low readability causes firms to trade at significant discounts relative to fundamentals.
Please check out the STATA code under "Code and Data" to reproduce our main results.
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Abstract and notes
The presence of a well-functioning shorting market can help correct under-pricing.
We propose that a deep and liquid short-selling market allows hedge funds to hedge long positions, enabling more aggressive trading on under-pricing and improving efficiency. Using the Hong Kong setting where only certain stocks are shortable, we find that shortability increases hedge fund buying of underpriced stocks and helps correct under-pricing.
Please click here for the Online Appendix.
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Abstract and notes
We put forward that investors generally are less excited about portfolios than they are about individual companies and that this has important asset pricing implications.
We propose that investor beliefs frequently cross, making it difficult to construct portfolios comprised solely of each investor’s favorite companies. With short-sale constraints, this leads portfolios to trade at discounts. We test the mechanism in settings where portfolio and component values can be separately evaluated.
Please click here for the Online Appendix.
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Why do Investors Like Short-Leg Securities? Evidence from a Textual Analysis of Buy Recommendations RFS
Abstract and notes
Our paper advocates for text-based methods as a complementary tool to investor surveys for extracting investor perceptions.
We analyze analyst reports and online stock opinion articles recommending short-leg securities. Textual analysis indicates that buy recommendations mostly emphasize lottery-like characteristics. We validate the text-based inferences through a one-time survey of institutional and retail investors.
Please click here for the Online Appendix.
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Abstract and notes
We use AI-driven interviews with 1,540 investors across ten countries to reveal thirteen distinct mechanisms that people actually use to pick stocks, exposing major heterogeneity and gaps in existing asset-pricing theories.
We conduct AI-driven field interviews with 1,540 investors across ten countries. Textual analysis uncovers thirteen mechanisms that form an empirically grounded taxonomy of investor behavior. We document substantial heterogeneity across and within investors and discuss implications for theory.
Please click here for the Online Appendix.
Research Program II: Social Finance
Social finance repository: Please click here.
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Abstract and notes
Social ties between corporate directors and CEOs appear to affect directors’ monitoring effectiveness.
We provide evidence that social ties between directors and CEOs matter, above and beyond conventional ties. Firms whose boards are conventionally and socially independent award lower compensation and exhibit stronger pay–performance and turnover–performance sensitivities.
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Abstract and notes
Stock opinions transmitted through social media can be very valuable.
We study whether investor opinions transmitted through social media predict future returns and earnings surprises. Using textual analysis of articles and commentaries, we find statistically significant and economically meaningful predictability.
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Abstract and notes
We suggest that high-skill finance professionals owe much of their success to the colleagues that surround them.
We study information sharing within brokerages, focusing on analysts covering M&As. Forecasts for the merged firm are more accurate when the analyst has a colleague covering the target prior to the M&A, especially when teams are small or the target analyst is high quality.
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Abstract and notes
We quantify how contagious financial news and opinions are.
We identify plausibly exogenous shocks that cause treated investors to trade abnormally, then trace contagion through their network. Borrowing methods from epidemiology, we estimate the rate of communication and heterogeneity in that rate.
Please click here for the Online Appendix.
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Abstract and notes
We propose that investors’ natural desire to cast themselves in a favorable light can inadvertently lead to the propagation of noise.
We study impression management in word-of-mouth communication and show that investors disproportionately share content suitable for impression management even when it is less informative about returns. High sharing associates with overpricing.
Please click here for the Online Appendix. If you are interested in the Twitter data, please click here.
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Abstract and notes
A survey of the empirical literature on the presence and economic consequences of word-of-mouth communication among investors.
I review empirical challenges and discuss recent evidence on word of mouth among retail and institutional investors. On balance, information transmitted through word of mouth does not appear to help investors make better decisions, and I discuss possible reasons and avenues for future research.
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Did the Game Stop for Hedge Funds? Working Paper
Abstract and notes
Retail investors increasingly use social media to coordinate and trade for ideological or strategic considerations.
We find evidence that public disclosures of hedge fund short positions attract retail investor activity on WallStreetBets, driving up prices of heavily shorted stocks and challenging institutional players. Hedge funds respond by reducing short positions, leading to prolonged overpricing.
Please click here for the Online Appendix.
"Minor" Research Program III: Information and New Technologies in Finance
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Abstract and notes
Our study documents how our increasing reliance on big data and technology is reshaping the role of human labor in finance.
We show that analysts increasingly adopt alternative data, and when they do so they generate more accurate forecasts and their brokerages receive higher trading commissions, suggesting that investors value analyst adoption of alternative data.
Please click here for the Online Appendix.
"Minor" Research Program IV: Managerial Beliefs, Preferences and Corporate Decisions
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Abstract and notes
Founder CEOs of S&P 1500 firms appear more confident (overconfident?) than their non-founder counterparts. Our finding may explain why large publicly traded firms managed by founder CEOs behave so differently.
We measure overconfidence via tone in CEO tweets, tone in earnings calls, management forecasts, and option exercise behavior. Founder CEOs use more optimistic language and issue forecasts that are too high; they also appear more likely to perceive undervaluation.
If you are interested in our founder dataset, please click here.