Smart Trading
Valuation and Long-Term Growth Expectations
Angel Tengulov, Josef Zechner & Jeffrey Zwiebel
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
Long-term growth expectations are central to investment analysis and corporate valuation. Despite a dominant effect on firm value, the academic literature and practitioner conventions provide little guidance on determining this long-term growth rate. This article takes a step in addressing this gap: we estimate the relationship between long-term growth and an extensive selection of firm, industry, and market characteristics. Market prices do not seem to fully capture long-term growth information. Cross sectional tests yield substantial positive abnormal returns for firms with high expected long-term growth.
Real Effects of Centralized Markets: Evidence from Steel Futures
Thorsten Martin
Review of Financial Studies, forthcoming
Abstract:
I study the real effects of centralized derivative markets using the staggered introduction of futures contracts for different steel products in the United States. Employing a difference-in-differences strategy, I find that the arrival of centralized futures markets improves price transparency and risk management in the underlying product market: price dispersion decreases and steel producers increase their hedging activity. Moreover, market share is reallocated toward low-cost producers, while product prices, producers’ profits, and valuations decrease. Overall, the results indicate that centralized futures markets foster competition in the product market.
The Impact of Repeated Financial Misinformation on Investments
Jin Ho Yun, Jake An & Michael Platt
University of Pennsylvania Working Paper, March 2025
Abstract:
In an era of digital misinformation, repeated exposure to false financial news may systematically shape investor sentiment and behavior. Across three studies-a 15-year panel data analysis, an online experiment, and a field experiment with retail investors-we examine how repeated exposure to negative financial misinformation interacts with one's financial confidence to influence risk-taking. In Study 1, panel data suggest that false news prevalence (proxied by its Google Trends data) increases market volatility when combined with bearish sentiment. In Studies 2 and 3, both online and field experiments reveal that repeated misinformation can amplify financial risk-taking, but only among highly confident investors. Our work highlights the unintended consequences of repeated financial misinformation, which can paradoxically motivate highly confident consumers to take greater financial risks in pursuit of higher returns.
The information advantage of industry common owners and its spillover effect on stock price crash risk
Qingyuan Li et al.
Journal of Corporate Finance, June 2025
Abstract:
Blockholding multiple firms within an industry generates an information advantage for institutional investors, who can better differentiate between the industry-wide and firm-specific nature of bad news released by peer firms and avoid selling on false spillover signals (i.e., “smart exit”). Empirically, we document that industry common ownership reduces future firm-level stock price crash risk. Our results can be explained by the attenuated spillover from industry peers' firm-specific bad news, as a complement to the monitoring effect that reduces the focal firm's hoarding of bad news. Our results suggest that the presence of industry common owners provides a stabilizing effect against stock price contagion.
Investor Memory
Katrin Gödker, Peiran Jiao & Paul Smeets
Review of Financial Studies, forthcoming
Abstract:
We provide experimental evidence of a positive memory bias that affects individuals’ beliefs, decisions to reinvest, and overconfidence in the stock market. Individuals overremember positive investment outcomes of chosen assets and underremember negative ones. Based on their memories, subjects form overly optimistic beliefs about their investment, reinvest too much, and become overconfident about their investment ability relative to others. We further provide evidence on motivation driving the memory bias. This positive memory bias offers a cognitive microfoundation for why gains weight more than losses when people learn from experiences. This helps reconcile various stylized facts in investor beliefs and behavior.
Investor Attention and Insider Trading
Sattar Mansi et al.
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We identify a new mechanism of opportunistic insider trading linked to attention-driven mispricing. Insiders are more likely to sell their company’s stock during periods of heightened retail attention and more inclined to buy when attention diminishes. The results are particularly pronounced for lottery-type stocks and firms with substantial retail ownership. We demonstrate that our findings -- which relate to indicators of mispricing, retail order imbalances, and Robinhood herding episodes -- extend to seasoned equity issuances and cannot be solely explained by firm fundamentals. Attention-based insider trading is less likely to result in SEC enforcement actions and persists across different regulatory regimes.
The Fed and the Secular Decline in Interest Rates
Sebastian Hillenbrand
Review of Financial Studies, April 2025, Pages 981-1013
Abstract:
This paper documents a striking fact: a narrow window around Fed meetings captures the entire secular decline in U.S. Treasury yields. Yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. Long-term bond yields decline when the Fed cuts the short rate and when the Fed lowers its long-run forecast of the federal funds rate (the “dot plot”). These results are consistent with the view that Fed announcements provide guidance about the long-run path of interest rates.
Does Finance Benefit Society? A Language Embedding Approach
Manish Jha, Hongyi Liu & Asaf Manela
Review of Financial Studies, forthcoming
Abstract:
We measure popular sentiment toward finance by applying a large language model to millions of books published in eight countries over hundreds of years. We extensively validate this measure both internally and externally. We document persistent differences in finance sentiment across countries despite ample time-series variation. Books written in the languages of more capitalist countries discuss finance in a more positive context. Finance sentiment is correlated with survey-based measures of financial market participation and income inequality. Finance sentiment declines one year before rather than after financial crises. Positive shocks to finance sentiment are followed by higher output and credit growth.