The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading
Amos Nadler et al.
Management Science, forthcoming
Growing evidence shows that biological factors affect individual financial decisions that could be reflected in financial markets. Testosterone, a chemical messenger especially influential in male physiology, has been shown to affect economic decision making, and is taken as a performance-enhancer among some financial professionals. This is the first experimental study to test how testosterone causally affects trading and prices. We exogenously elevated testosterone in male traders, and tested testosterone's effect both on their trading behavior in experimental asset markets and on the size and duration of asset price bubbles. Using both aggregated and individual trading data, we find that testosterone administration generated larger and longer-lasting bubbles by causing high bids and the slow incorporation of the asset's fundamental value.
Early Peek Advantage? Efficient Price Discovery with Tiered Information Disclosure
Grace Xing Hu, Jun Pan & Jiang Wang
Journal of Financial Economics, forthcoming
From 2007 to June 2013, a small group of fee-paying, high-speed traders receive the Michigan Index of Consumer Sentiment two seconds before its broader release. Within this early peek window, we find highly concentrated trading and a fast price discovery of less than 200 milliseconds. Outside this narrow window, general investors trade at fully adjusted prices. We further establish a causal relationship between the early peek mechanism and the fast price discovery by isolating the impact of the early peek arrangement along two dimensions. In cross section, we use other news releases without the early peek (as controls); in time series, we use the sudden suspension of the early peek arrangement in July 2013 (as the treatment). Our difference-in-difference tests directly connect the early peek arrangement to more efficient price discovery - it results in faster price discovery, lower volatility, and faster resolution of uncertainty. These results show that contrary to the common perception, tiered information release may help to reduce, rather than enhance, the informational advantage of faster traders and improve the efficiency of the price discovery process in financial markets.
'Yes We Can' Invest: The Effect of President Obama on Portfolio Choice
Yosef Bonaparte & George Korniotis
University of Colorado Working Paper, August 2017
We examine the effect of President Obama, a role model for minorities, on their financial decisions. We conjecture that his political success is a positive experience for minorities that should spur optimism, mitigate perceived risks, and enhance trust in institutions like the stock market. Consequently, post-2008 minorities should increase their exposure to financial risk. We find that post-2008 and compared to white Americans, minorities are more risk tolerant, participate more in the stock market, trade more often, and invest more in risky assets. Also, post-election, minorities are more willing to save. Overall, our findings suggest that external factors, like the rise of a role model, are equally important for portfolio decisions as traditional factors like age, income, and education.
Financialization in Commodity Markets
V.V. Chari & Lawrence Christiano
NBER Working Paper, September 2017
The financialization view is that increased trading in commodity futures markets is associated with increases in the growth rate and volatility of commodity spot prices. This view gained credence because in the 2000s trading volume increased sharply and many commodity prices rose and became more volatile. Using a large panel dataset we constructed, which includes commodities with and without futures markets, we find no empirical link between increased futures market trading and changes in price behavior. Our data sheds light on the economic role of futures markets. The conventional view is that futures markets provide one-way insurance by allowing outsiders, traders with no direct interest in a commodity, to insure insiders, traders with a direct interest. The data are not consistent with the conventional view and we argue that they point to an alternative mutual insurance view, in which all participants insure each other. We formalize this view in a model and show that it is consistent with key features of the data.
Price clustering in Bitcoin
Economics Letters, October 2017, Pages 145-148
Investor and media attention in Bitcoin has increased substantially in recently years, reflected by the incredible surge in news articles and considerable rise in the price of Bitcoin. Given the increased attention, there little is known about the behaviour of Bitcoin prices and therefore we add to the literature by studying price clustering. We find significant evidence of clustering at round numbers, with over 10% of prices ending with 00 decimals compared to other variations but there is no significant pattern of returns after the round number. We also support the negotiation hypothesis of Harris (1991) by showing that price and volume have a significant positive relationship with price clustering at whole numbers.
Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows
Samuel Hartzmark & Abigail Sussman
University of Chicago Working Paper, August 2017
Examining a shock to the salience of the sustainability of $8 trillion of mutual fund assets, we present evidence that investors value sustainability. Being categorized as a low sustainability fund resulted in outflows of more than $12 billion and an increased probability of liquidation. High sustainability funds received inflows greater than $22 billion. We can reject that mutual fund investors on average view sustainability negatively or do not care about sustainability. Investors reacted to the extreme categories, largely ignoring middle categories and detailed aspects of the ratings. Experimental evidence suggests that higher sustainability is viewed as a positive predictor of future performance, but we do not find evidence of such performance in the data.
Precautionary savings, retirement planning and misperceptions of financial literacy
Anders Anderson, Forest Baker & David Robinson
Journal of Financial Economics, forthcoming
We measure financial literacy among LinkedIn members, complementing standard questions with additional questions that allow us to gauge self-perceptions of financial literacy. Average financial literacy is surprisingly low given the demographics of our sample: fewer than two-thirds of chief financial officers, chief executive officers, and chief operating officers complete the test correctly. Financial literacy, precautionary savings and retirement planning are positively correlated, but this is mostly driven by perceived, not actual, literacy: controlling for self-perceptions, actual literacy has low predictive power. Perceptions drive decision-making among low-literacy respondents and are associated with mistaken beliefs about financial products and less willingness to accept financial advice.
The Structural Origins of Unearned Status: How Arbitrary Changes in Categories Affect Status Position and Market Impact
Anne Bowers & Matteo Prato
Administrative Science Quarterly, forthcoming
Focusing on the categorical nature of many status orderings, we examine the relationship among status, actors' quality, and market outcomes. As markets evolve, the number of categories that structure them can increase, creating opportunities for new actors to be bestowed status, or it can decrease, dethroning certain actors from their superior standing. In both cases, gains and losses of status may occur without changes in actors' quality. Because audiences rely on status signals to infer the value of market actors, these exogenously generated status shifts can translate into changes in how audiences perceive actors, resulting in benefits for unearned status gains and costs for unearned status losses. We find support for our hypotheses in a sample of equity analysts at U.S. brokerage firms. Using data on the coveted Institutional Investor magazine All-Star award, we find that analysts whose status increases because of a category addition see corresponding increases in the stock market's response to their earnings estimates, while those who lose status see corresponding reductions. Our results suggest that the greater weight accorded to high-status actors may be misguided if that status occurs for structural reasons such as category changes rather than because of an actor's own quality.
Measuring Up? Persistence and Change in Analysts' Evaluative Schemas Following Technological Change
Mary Benner & Ram Ranganathan
Organization Science, July-August 2017, Pages 760-780
We examine shifts in how analysts assess the strategies of incumbent firms following a radical technological change. Specifically, we use an inductive study of earnings conference call transcripts and analyst reports to study how analysts' evaluative schemas change with technological change in the wireline telecommunications industry. We find three temporal themes. At first, analysts pressure firms to reverse strategic changes that are at odds with the existing "income"-focused metrics and logic that constitute the evaluative schema. Next, schema change unfolds with the ongoing technological change, as firm performance declines when measured with traditional metrics, and as managers frame strategic changes using new "growth"-focused metrics and logic. Finally, a distinct shift in the schema is apparent as analysts' increasing attention to growth spurs a more positive view of strategic changes that they previously opposed, a less positive view of previously supported strategies that conformed to an income logic, and the application of the growth logic even to a firm not pursuing growth-oriented strategic changes. Results from a supplementary content analysis support these results, showing a temporal shift toward "growth" words in analyst reports and conference calls. Our process model emphasizes the gradual shifts in analysts' evaluative schemas that ultimately support firm responses to a new technology. We highlight the importance of managerial framing as firms facing technological change pursue strategic responses that initially diverge from stakeholders' expectations, as well as the possibility that as schemas shift, actions that initially conform to analysts' expectations may be questioned.
Synthetic Credit Ratings and the Inefficiency of Agency Ratings
Columbia University Working Paper, July 2017
This study develops and evaluates a model that generates synthetic credit ratings using accounting and market based information. The model performs very well in explaining agency ratings, suggesting that fitted values for unrated companies are likely to be reasonably precise. In addition, the synthetic credit ratings help explain cross sectional differences in CDS spreads, even after controlling for contemporaneous agency ratings. The incremental information provided by agency ratings relative to the synthetic ratings has declined substantially in recent years, possibly due to new SEC regulation that limits rating agencies' ability to obtain confidential information from rated companies. Consistent with the finding that agency ratings do not fully impound the information in the synthetic credit ratings, differences between the synthetic and agency ratings predict changes in agency ratings in subsequent months, especially for small companies. This relationship is very significant, both statistically and economically, and while it monotonically declines over the forecasting horizon, the difference between the synthetic and agency ratings predicts changes in agency ratings as far as 24 months later. There is no evidence of substantial improvement over the last thirty years in the timeliness of agency ratings with respect to the information in synthetic ratings. Investors, in contrast, appear to process the synthetic rating information in a timely fashion, as the difference between the synthetic and agency ratings does not predict changes in CDS spreads or in stock prices.
Negativity and Positivity Biases in Economic News Coverage: Traditional Versus Social Media
Stuart Soroka et al.
Communication Research, forthcoming
Past work suggests that the priorities for information propagation in social media may be markedly different from the priorities for news selection in traditional media outlets. We explore this possibility here, focusing on the tone of both newspaper and Twitter content following changes in the U.S. unemployment rate, from 2008 to 2014. Results strongly support the expectation that while the tone of newspaper content exhibits stronger reactions to negative information, the tone of Twitter content reacts more strongly to positive economic shifts.
Informing the Market: The Effect of Modern Information Technologies on Information Production
Meng Gao & Jiekun Huang
University of Illinois Working Paper, August 2017
Modern information technologies have fundamentally changed how information is disseminated in financial markets. Using the staggered implementation of the EDGAR system in 1993-1996 as a shock to information dissemination technologies, we find evidence that internet dissemination of corporate information increases information production by corporate outsiders. Specifically, trades by individual investors in a stock become more informative about future stock returns after the stock becomes subject to mandatory filing on EDGAR. This effect is driven primarily by investors who have access to the internet. The amount and accuracy of information produced by sell-side analysts increase following the EDGAR implementation. Market responses to analyst revisions also become stronger after a firm becomes an EDGAR filer. Furthermore, stock pricing efficiency improves after the EDGAR implementation. Overall, these results suggest that greater and broader information dissemination facilitated by modern information technologies improves information production and stock pricing efficiency.
Investors and Choice Overload: Evidence from IPOs
Ansley Chua, Jared DeLisle & Tareque Nasser
Kansas State University Working Paper, August 2017
This paper provides evidence consistent with retail investors experiencing choice overload when presented with an increasing number of IPOs to choose from. We find that both the average first day return and trading volume are lower in weeks with higher number of IPOs. However, with more IPOs, average return during the week following the first day of trading is higher. These findings suggest that proliferation of choices either debilitates or delays investor participation due to cognitive limitations.
The Interpretation of Unanticipated News Arrival and Analysts' Skill
Amir Rubin, Benjamin Segal & Dan Segal
Journal of Financial and Quantitative Analysis, August 2017, Pages 1491-1518
Analysts' functions are divided into discovery and interpretation roles, but distinguishing between the two is nontrivial. We conjecture that analysts' interpretation skill can be gauged by their forecast revisions following material unanticipated news, in particular, following nonearnings 8-K reports, which arrive at the market unexpectedly. We establish that unanticipated 8-Ks are informative for analysts and find that analysts who are more likely to revise their forecasts following unanticipated 8-Ks provide more timely and accurate forecasts. We document a positive association between analysts' tendency to react to unanticipated 8-Ks and market reaction to their recommendation changes, suggesting investors prefer these analysts' opinions.