Market Signals
Do Responsible Investors Invest Responsibly?
Rajna Gibson Brandon et al.
Review of Finance, forthcoming
Abstract:
We study whether institutional investors that sign the Principles for Responsible Investment (PRI), a commitment to responsible investing, exhibit better portfolio-level environmental, social, and governance (ESG) scores. Signatories outside the US have superior ESG scores than non-signatories, but US signatories have at best similar ESG ratings, and worse scores if they have underperformed recently, are retail-client facing, and joined the PRI late. US signatories do not improve the ESG scores of portfolio companies after investing in them. Commercial motives, uncertainty about fiduciary duties, and lower ESG market maturity explain why US-domiciled PRI signatories do not follow through on their responsible investment commitments.
Do Investors Care about Impact?
Florian Heeb et al.
Review of Financial Studies, forthcoming
Abstract:
We assess how investors’ willingness-to-pay (WTP) for sustainable investments responds to the social impact of those investments, using a framed field experiment. While investors have a substantial WTP for sustainable investments, they do not pay significantly more for more impact. This also holds for dedicated impact investors. When investors compare several sustainable investments, their WTP responds to relative, but not to absolute, levels of impact. Regardless of investments' impact, investors experience positive emotions when choosing sustainable investments. Our findings suggest that the WTP for sustainable investments is primarily driven by an emotional, rather than a calculative, valuation of impact.
Retail trader sophistication and stock market quality: Evidence from brokerage outages
Gregory Eaton et al.
Journal of Financial Economics, November 2022, Pages 502-528
Abstract:
We study brokerage platform outages to examine the impact of retail investors on financial markets. We contrast outages at Robinhood, which caters to inexperienced investors, with outages at traditional retail brokers. For stocks with high retail interest, we find that negative shocks to Robinhood investor participation are associated with reduced market order imbalances, increased market liquidity, and lower return volatility, whereas the opposite relations hold following outages at traditional retail brokerages. The findings suggest that herding by inexperienced investors can create inventory risks that harm liquidity in stocks with high retail interest, while other retail trading improves market quality.
Social Preferences of Young Professionals and the Financial Industry
Andrej Gill et al.
Management Science, forthcoming
Abstract:
Trust is an important element of many financial transactions. Yet, the financial industry has been struggling with public mistrust. One explanation for this could be the selection of individuals who wish to work in and get job offers from the financial industry. In this paper, we examine the selection into the financial industry based on social preferences. We identify the social preferences of business and economics students, and, for more than six years, follow up on their early career choices and their job placement after graduation. Students eager to work in the financial industry behave in a substantially less trustworthy manner and show less willingness to cooperate than those with other career plans. The job market does not alleviate this selection. Those subjects who find their first permanent job in finance behave in significantly less trustworthy manner in a trust game than those working in other industries.
Information asymmetry in the NFL gambling market: Inside information versus informed bettors
Corey Shank
Journal of Behavioral and Experimental Finance, forthcoming
Abstract:
I employ a unique NFL gambling dataset to disentangle information asymmetry between bettors and sportsbooks. In contrast to expectations, I find no evidence that sportsbooks hold more information than the bettors. In fact, the results show that in instances where sportsbooks behave as if they are informed, the market is inefficient and gamblers are earning a profit. One explanation for these results is that gamblers are more informed than the sportsbooks.
Capital Gains Tax, Venture Capital, and Innovation in Start-Ups
Lora Dimitrova & Sapnoti Eswar
Review of Finance, forthcoming
Abstract:
We examine the effect of staggered changes in the state-level capital gains tax on venture capital (VC)-backed start-ups and show that an increase in the tax rate of VC firms reduces the quantity and quality of patents by the start-ups. The results are consistent with a reduction in VC firms’ incentives to provide effort: increases in the capital gains tax for VC firms lead to incrementally lower innovation exchanges between start-ups in the VC firm’s portfolio. VC firms also decrease the level of investment in start-ups and the size of their portfolio as well as increase the number of start-ups that they write off.
Do Private Equity Managers Raise Funds on (Sur)real Returns? Evidence from Deal-Level Data
Niklas Hüther
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
Recent studies on agency problems in private equity fueled the suspicion that fund managers strategically manipulate performance estimates around fundraising times. While these studies use aggregated portfolio data, this paper offers the first analysis of "window dressing" in private equity based on deal-level performance. In contrast to previous findings of a smoking gun at the fund level, I do not find any evidence of inflated performance at the deal level. Fund performance peaks are driven by a cohort effect whereby late investments are made under pressure before fundraising and have lower returns than those made earlier in the fund’s life.
Fee the People: Retail Investor Behavior and Trading Commission Fees
Omri Even-Tov et al.
University of California Working Paper, October 2022
Abstract:
We show retail investors are highly responsive to changes in trading commission fees. Using a triple-difference research design around the removal of fees for retail investors on the international retail broker platform, eToro, we show investors responded by trading approximately 30% more frequently, in smaller order sizes, and increasing portfolio turnover. Removing fees also spurred retail investors to reallocate their portfolios and diversify. Retail investors’ gross return performance did not significantly change around the fee removal despite trading more often, but retail investors earned significantly higher returns on a net basis after accounting for fees incurred in the pre-period. Finally, using demographic information, we show removing fees disproportionately affected inexperienced investors with lower deposit amounts and lesser technological sophistication both by expanding the extensive margin of investors and changing trading activity for the intensive margin of investors. Together, our results suggest commission fees play an influential role as a speed bump for retail investor participation, trading activity, and diversification.
Do Rating Agencies Behave Defensively for Higher Risk Issuers?
Samuel Bonsall et al.
Management Science, forthcoming
Abstract:
We examine whether rating agencies act defensively toward issuers with a higher likelihood of default. We find that agencies’ qualitative soft rating adjustments are more accurate as issuers’ default risk grows, as evidenced by the adjustments leading to lower type I and type II error rates and better prediction of default and default recovery losses. We also find that soft adjustments’ relevance increases with issuers’ default risk, as evidenced by the adjustments being more predictive of initial offering yields and leading to a greater market reaction to rating changes. Further, we find that the rating agencies assign better educated and more experienced analysts to higher-risk issuers, providing evidence of one mechanism used by the rating agencies to generate more accurate and relevant soft adjustments. Overall, our study suggests that as the likelihood of issuer default grows, the threat of reputational harm from discovered rating failures increasingly mitigates the rating agencies’ strategic behavior incentivized by the issuer-pay model.