Floored
Interoceptive Ability Predicts Survival on a London Trading Floor
Narayanan Kandasamy et al.
Scientific Reports, September 2016
Abstract:
Interoception is the sensing of physiological signals originating inside the body, such as hunger, pain and heart rate. People with greater sensitivity to interoceptive signals, as measured by, for example, tests of heart beat detection, perform better in laboratory studies of risky decision-making. However, there has been little field work to determine if interoceptive sensitivity contributes to success in real-world, high-stakes risk taking. Here, we report on a study in which we quantified heartbeat detection skills in a group of financial traders working on a London trading floor. We found that traders are better able to perceive their own heartbeats than matched controls from the non-trading population. Moreover, the interoceptive ability of traders predicted their relative profitability, and strikingly, how long they survived in the financial markets. Our results suggest that signals from the body - the gut feelings of financial lore - contribute to success in the markets.
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Limited Attention, Marital Events and Hedge Funds
Yan Lu, Sugata Ray & Melvyn Teo
Journal of Financial Economics, forthcoming
Abstract:
We explore the impact of limited attention by analyzing the performance of hedge fund managers who are distracted by marital events. We find that marriages and divorces are associated with significantly lower fund alpha, during the six-month period surrounding and the two-year period after the event. Busy managers who manage multiple funds and who are not part of a team are more affected by marital transitions. Inattentive managers place fewer active bets relative to their style peers, load more on index stocks, exhibit higher R-squareds with respect to systematic factors, and are more prone to the disposition effect.
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Evidence and Implications of Short-Termism in US Public Capital Markets: 1980-2013
Rachelle Sampson & Yuan Shi
University of Maryland Working Paper, July 2016
Abstract:
In this paper, we provide evidence of increasing short-termism in US equity capital markets over the period of 1980-2013. Using a ‘market discount factor’ estimated for publicly traded firms based on a capital asset pricing model, we show that US capital markets have become increasingly short-term oriented over the past thirty years. We corroborate this finding by estimating the impact of various investment behaviors and relevant ownership variables on our measure of short-termism, market discounting. We find that markets more heavily discount firms that have less financial slack, spend less on capital or R&D, or have greater analyst coverage. Consistent with prior research, we also find that public firms held by more transient institutional investors (i.e., investors that have significant turnovers of stocks) are more heavily discounted than their counterparts held by dedicated investors (i.e., investors that hold stocks for the long term). Further, firms that pay their executives proportionately more via long-term compensation packages are discounted less than firms with more short-term compensation. To examine the impact of short-term valuation on firm behavior, we also estimate the impact of short-termism on capital spending using changes in a firm’s institutional ownership type (e.g., a switch from transient to dedicated or vice versa) as an identification mechanism. We find that short-term market valuations are significantly negatively correlated with future capital investment. Overall, these results suggest that market discounting may proxy for firm short-termism. To our knowledge, this is the first paper to demonstrate economy-wide, firm-level evidence of increasing short-termism and the implications for investment behaviors by firms.
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Market Liquidity and the U.S. Government Shutdown of 2013
Ryan Ball, Venky Nagar & Jordan Schoenfeld
University of Michigan Working Paper, September 2016
Abstract:
This study measures the effect of U.S. Federal Government policy uncertainty on U.S. financial market liquidity. From October 1 to 16, 2013, the Government shut down. We argue that the onset and duration of the shutdown were uncertain, and view the shutdown as a liquidity-unrelated shock that increased Government policy uncertainty. During the shutdown, liquidity and price efficiency of U.S. firms significantly deteriorated relative to a control period and to control samples of foreign firms and firms with international exposure. Our results build on recent studies that argue that Government policy uncertainty has a substantial impact on financial markets.
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How persistent is private equity performance? Evidence from deal-level data
Reiner Braun, Tim Jenkinson & Ingo Stoff
Journal of Financial Economics, forthcoming
Abstract:
The persistence of returns is a critical issue for investors in their choice of private equity managers. In this paper, we analyse buyout performance persistence in new ways, using a unique database containing cash flow data on 13,523 portfolio company investments by 865 buyout funds. We focus on unique realized deals and find that persistence of fund managers has substantially declined as the private equity sector has matured and become more competitive. Private equity has, therefore, largely conformed to the pattern found in most other asset classes in which past performance is a poor predictor of the future.
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Herd Behavior and Mutual Fund Performance
Andrew Koch
Management Science, forthcoming
Abstract:
I develop fund-level measures of the similarity in trading of mutual fund managers, resulting in the identification of leaders, contemporaneously herding managers, and followers. I find evidence of a persistent group of funds whose trades lead the aggregate trades of the mutual fund industry; these leader funds exhibit strong subsequent performance, consistent with informed trading. By contrast, there is no evidence that managers that trade together, either contemporaneously or with a lag, outperform. These findings suggest that managers of leader funds receive in advance private signals regarding the information upon which other funds focus.
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Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand
Yawen Jiao, Massimo Massa & Hong Zhang
Journal of Financial Economics, forthcoming
Abstract:
The existing literature treats the short side (i.e., short selling) and the long side of hedge fund trading (i.e., fund holdings) independently. The two sides, however, complement each other: opposite changes in the two are likely to be driven by information, whereas simultaneous increases (decreases) of the two may be motivated by hedging (unwinding) considerations. We use this intuition to identify informed demand and document that it exhibits highly significant predictive power over returns (approximately 10% per year). We also find that informed demand forecasts future firm fundamentals, suggesting that hedge funds play an important role in information discovery.
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Francis Larson, John List & Robert Metcalfe
NBER Working Paper, September 2016
Abstract:
Behavioral economists have recently put forth a theoretical explanation for the equity premium puzzle based on combining myopia and loss aversion. Complementing the behavioral theory is evidence from laboratory experiments, which provide strong empirical support consistent with myopic loss aversion (MLA). Yet, whether, and to what extent, such preferences underlie behaviors of traders in their natural domain remains unknown. Indeed, a necessary condition for the MLA theory to explain the equity premium puzzle is for marginal traders in markets to exhibit such preferences. Using minute-by-minute trading observations from over 864,000 price realizations in a natural field experiment, we find data patterns consonant with MLA: in their normal course of business, professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information. Beyond testing theory, these results have important implications for efficient resource allocation as well as characterizing the optimal structure of social and economic policies.
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News implied volatility and disaster concerns
Asaf Manela & Alan Moreira
Journal of Financial Economics, forthcoming
Abstract:
We construct a text-based measure of uncertainty starting in 1890 using front-page articles of the Wall Street Journal. News implied volatility (NVIX) peaks during stock market crashes, times of policy-related uncertainty, world wars, and financial crises. In US postwar data, periods when NVIX is high are followed by periods of above average stock returns, even after controlling for contemporaneous and forward-looking measures of stock market volatility. News coverage related to wars and government policy explains most of the time variation in risk premia our measure identifies. Over the longer 1890–2009 sample that includes the Great Depression and two world wars, high NVIX predicts high future returns in normal times and rises just before transitions into economic disasters. The evidence is consistent with recent theories emphasizing time variation in rare disaster risk as a source of aggregate asset prices fluctuations.
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Under-Weighting of Private Information by Top Analysts
Gil Aharoni, Eti Einhorn & Qi Zeng
Journal of Accounting Research, forthcoming
Abstract:
It is conventionally perceived in the literature that weak analysts are likely to under-weight their private information and strategically bias their announcements in the direction of the public beliefs to avoid scenarios where their private information turns out to be wrong, whereas strong analysts tend to adopt an opposite strategy of over-weighting their private information and shifting their announcements away from the public beliefs in an attempt to stand out from the crowd. Analyzing a reporting game between two financial analysts, who are compensated based on their relative forecast accuracy, we demonstrate that it could be the other way around. An investigation of the equilibrium in our game suggests that, contrary to the common perception, analysts who benefit from information advantage may strategically choose to understate their exclusive private information and bias their announcements toward the public beliefs, while exhibiting the opposite behavior of overstating their private information when they estimate that their peers are likely to be equally informed.
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Do Underwriters Compete in IPO Pricing?
Evgeny Lyandres, Fangjian Fu & Erica Li
Management Science, forthcoming
Abstract:
We propose and implement a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion among underwriters. We construct a simple model of interaction between heterogenous underwriters and heterogenous firms and solve it under two alternative assumptions: oligopolistic competition among underwriters and implicit collusion among them. The two solutions lead to different equilibrium relations between the compensation of underwriters of different quality on one hand and the time-varying demand for public incorporation on the other hand. Our empirical results, obtained using 39 years of IPO data, are generally consistent with the implicit collusion hypothesis – banks, especially larger ones, seem to internalize the effects of their underwriting fees and IPO pricing on their rivals.
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Labor Market Dynamics and Analyst Ability
Michael Clement & Kelvin Law
University of Texas Working Paper, September 2016
Abstract:
We examine whether brokerage firms can identify differences in innate ability when hiring analysts. When the local unemployment rate is high, there will be a larger pool of job candidates per analyst job. If brokerage houses are able to identify differences in ability, analysts hired during these challenging times should have higher ability than those hired at other times. Using local unemployment rate as a proxy for the supply of analysts, we find that analysts who are hired when the local unemployment rate is high are more likely to be elected all-star analysts, and obtain more all-star awards than analysts who are hired at other times. However, these high-ability analysts, who otherwise might not have chosen analysts as a profession, are more likely to leave the profession when local labor market conditions subsequently improve.
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Before an Analyst Becomes an Analyst: Does Industry Experience Matter?
Daniel Bradley, Sinan Gokkaya & Xi Liu
Journal of Finance, forthcoming
Abstract:
Using hand-collected biographical information on financial analysts from 1983 to 2011, we find that analysts making forecasts on firms in industries related to their pre-analyst experience have better forecast accuracy, evoke stronger market reactions to earning revisions, and are more likely to be named Institutional Investor all-stars. Exogenous losses of analysts with related industry experience have real financial market implications — changes in firms’ information asymmetry and price reactions are significantly larger than those of other analysts. Overall, industry expertise acquired from pre-analyst work experience is valuable to analysts, consistent with the emphasis placed on their industry knowledge by institutional investors.
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Pay Now or Pay Later?: The Economics within the Private Equity Partnership
Victoria Ivashina & Josh Lerner
NBER Working Paper, September 2016
Abstract:
The economics of partnerships have been of enduring interest to economists, but many issues regarding intergenerational conflicts and their impact on the continuity of these organizations remain unclear. We examine 717 private equity partnerships, and show that (a) the allocation of fund economics to individual partners is divorced from past success as an investor, being instead critically driven by status as a founder, (b) the underprovision of carried interest and ownership — and inequality in fund economics more generally — leads to the departures of senior partners, and (c) the departures of senior partners have negative effects on the ability of funds to raise additional capital.
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On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier?
Elie Bouri et al.
Finance Research Letters, forthcoming
Abstract:
This paper uses a dynamic conditional correlation model to examine whether Bitcoin can act as a hedge and safe haven for major world stock indices, bonds, oil, gold, the general commodity index and the US dollar index. Daily and weekly data span from July 2011 to December 2015. Overall, the empirical results indicate that Bitcoin is a poor hedge and is suitable for diversification purposes only. However, Bitcoin can only serve as a strong safe haven against weekly extreme down movements in Asian stocks. We also show that Bitcoin hedging and safe haven properties vary between horizons.
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Do short sellers exploit industry information?
Zsuzsa Huszár, Ruth Tan & Weina Zhang
Journal of Empirical Finance, forthcoming
Abstract:
This study provides new evidence about short sellers' trading strategies by showing that short sellers exploit firm information in combination with industry information in their trades. In industries with the highest aggregate shorted values, the most-shorted stocks earn about 1.535% lower abnormal returns than other highly shorted stocks in less shorted industries over the next six months. These results are likely driven by short sellers’ preference for complex industries with the highest profit potential. We also show that the aggregate shorted value at the industry level is able to predict important industry shifts, such as declines in sales and increased competition. Overall, our results suggest that short sellers help to reduce information complexity and improve economic efficiency at the industry level.