Up and Down
The Groundhog Day stock market anomaly
Savva Shanaev, Arina Shuraeva & Svetlana Fedorova
Finance Research Letters, forthcoming
This paper discovers a distinct calendar anomaly on the US stock market associated with the Groundhog Day prognostication tradition across 1928–2021. There are significant positive abnormal returns around the "prediction" of an early spring, while buy-and-hold returns around the "prediction" of a long winter are 2.78% lower. The results are robust in subsamples, to a set of placebo tests for international stock indices, and cannot be explained by January effect, the "halloween Indicator", turn-of-the-month effect, or other seasonalities. The findings imply major and persistent irrational optimism of US investors revolving around Groundhog Day early spring prognostications.
Partisanship and Portfolio Choice: Evidence from Mutual Funds
Will Cassidy & Blair Vorsatz
University of Chicago Working Paper, December 2021
Political beliefs matter for the behavior of institutional investors. Contrary to conventional wisdom, we show that whether a mutual fund team is Republican or Democratic has a first-order effect on the fund’s portfolio choice. Before and after the 2016 Presidential election, Republican teams actively purchase more equity, especially in high beta industries. Around the 2020 election, Democratic teams do the same. The flip in trading behavior rules out conventional risk aversion-based explanations for the role of partisanship. Instead, political beliefs appear to drive this trading, with managers appearing more optimistic when their political party wins the presidency. These effects are also present in 2012 but have grown over time.
Does Wall Street Discriminate by Race? Evidence from Analyst Target Prices
Kathy Rupar, Sean Wang & Hayoung Yoon
Southern Methodist University Working Paper, January 2022
Analyzing over 97,000 price target valuations from 2005-2020, we find analysts’ judgments reflect over four times more pessimism per dollar of negative earnings news for Non-White CEO firms, resulting in lower target valuations. These lower target valuations are associated with an increased likelihood that Non-White CEO firms exceed their price targets, suggesting such pessimism is unwarranted. Further analyses reveal that the time-series variation in analysts’ pessimism is associated with several exogenous measures of racial sentiment (i.e., Donald Trump’s presidency, Black Lives Matter, and the annual number of racial bias crimes), consistent with racial discrimination that results in a greater negative impact of bad news on analysts’ valuations when the CEO is Non-White.
Regulating via Social Media: Deterrence Eﬀects of the SEC's Use of Twitter
Yale Working Paper, November 2021
This paper presents the ﬁrst evidence of the eﬀect of ﬁnancial regulators’ social media use on corporate and individual behavior. Using the staggered launch of U.S. Securities and Exchange Commission (SEC) regional oﬃces’ Twitter accounts, I ﬁnd that ﬁnancial regulators’ presence on social media reduces opportunistic insider trading, customer complaints against investment advisers, and ﬁnancial misreporting. Additional tests suggest that the salience and dissemination of regional oﬃces’ enforcement activities via Twitter play a role. The deterrence eﬀect of SEC regional oﬃces’ Twitter use is concentrated among oﬃces with more followers, ﬁrms with more retail investors, and advisers with more retail clients. I also show that investors react more strongly to enforcement actions after the enforced ﬁrm’s regional oﬃce initiates Twitter use. Taken together, the results suggest that ﬁnancial regulators’ use of social media helps deter misconduct.
Cross-Border Activities as a Source of Information: Evidence from Insider Trading during the Covid-19 Crisis
Ohio State University Working Paper, December 2021
Insider trading during the early months of the COVID-19 pandemic provides a unique opportunity to study how corporate insiders benefit from information flows in their network of business contacts. I find that insiders at firms with activities in China sell more shares of their companies than other insiders and do so earlier. Consistent with an information channel, I show that firms with supply-chain relationships and subsidiaries in China, more local assets and employees, and insiders overseeing global operations drive these effects. Insiders' private information seems to have been forward-looking, which allowed them to avoid significant losses during the period.
Alumni Networks in Entrepreneurial Financing
Jon Garfinkel, Erik Mayer & Emmanuel Yimfor
University of Iowa Working Paper, November 2021
One in three deals in the early-stage financing market involves an investor and founder from the same alma mater. We show that founders' connections to early-stage investors through shared education networks are more important than school academic quality or shared geography in facilitating access to funding. Early-stage investors tilt their portfolios toward startups from their alma mater and place larger bets on these firms. Connected investments outperform the same investors' non-connected investments. Our results are stronger where information about founder abilities is likely less clear.
Cultural Biases in Equity Analysis
Journal of Finance, February 2022, Pages 163-211
A more positive cultural trust bias by an equity analyst's country of origin toward a firm's headquarter country is associated with significantly more positive stock recommendations. The cultural bias effect is stronger for eponymous firms whose names mention their home country and varies over time, increasing with negative sentiment. I find evidence of a negative North-South bias during the European debt crisis and United Kingdom-Europe divergence amid Brexit. Share price reactions to recommendations by more biased analysts are weaker, and more biased recommendations are worse predictors of monthly stock returns. More positively biased analysts also assign higher target prices.
Do Private Equity Managers Have Superior Information on Public Markets?
Journal of Financial and Quantitative Analysis, February 2022, Pages 321-358
Using cash flows from a large sample of buyout and venture funds, I show that private equity (PE) distributions predict returns in the industries of funds’ specialization. My tests distinguish timing skill from reactions to market conditions and spillover effects of PE activity. Fund managers foresee comparable public firms’ earnings but sell at the industry peaks only if they have performance fees to harvest. These results have implications for manager selection and improve our understanding of PE fund returns and the role of PE in capital markets.
Complexity aversion when Seeking Alpha
Journal of Accounting and Economics, forthcoming
A global field experiment with Seeking Alpha shows that textual complexity affects investor attention to news and market outcomes. Investors were randomly assigned different titles for the same news article. Holding the article fixed, a one-standard-deviation increase in complexity leads to 6.1% fewer views. Complexity is more off-putting for less-sophisticated investors, when attention is more limited, and when the news is likely less important. Exploiting an arbitrary rule for breaking ties between tested titles, I find that title complexity affects markets — lowering announcement turnover and volatility.
Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification
Pablo Ottonello & Wenting Song
NBER Working Paper, January 2022
We provide empirical evidence of the causal effects of changes in financial intermediaries' net worth in the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries' net worth in a narrow window around their earnings announcements, based on U.S. tick-by-tick data. Using these shocks, we estimate that news of a 1-percent decline in intermediaries' net worth leads to a 0.2-0.4 percent decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
Non-Deal Roadshows, Informed Trading, and Analyst Conflicts of Interest
Daniel Bradley, Russell Jame & Jared Williams
Journal of Finance, February 2022, Pages 265-315
Non-deal roadshows (NDRs) are private meetings between management and institutional investors, typically organized by sell-side analysts. We find that around NDRs, local institutional investors trade heavily and profitably, while retail trading is significantly less informed. Analysts who sponsor NDRs issue significantly more optimistic recommendations and target prices, together with more “beatable” earnings forecasts, consistent with analysts issuing strategically biased forecasts to win NDR business. Our results suggest that NDRs result in a substantial information advantage for institutional investors and create significant conflicts of interests for the analysts who organize them.
Price explosiveness in cryptocurrencies and Elon Musk's tweets
Syed Jawad Hussain Shahzad, Muhammad Anas & Elie Bourie
Finance Research Letters, forthcoming
We detect episodes of price explosivity and collapse in Bitcoin and its contender Dogecoin using four-hourly data. The results show multiple bubble episodes in both cryptocurrencies, with a more frequent occurrence in Bitcoin. Collapse episodes are only observed in Bitcoin. We relate price explosivity to Elon Musk's tweets. His cryptocurrency-related general tweets have contributed to the price explosivity of Bitcoin, whereas his Dogecoin-specific tweets have contributed to price explosivity in Dogecoin. Our findings highlight the influential role of key persons through social media on the formation of bubbles, which matters to the decision-making of cryptotraders and market efficiency.
Sowing the Seeds of a Future Crisis: The SEC and the Emergence of the Nationally Recognized Statistical Rating Organization (NRSRO) Category, 1971–1975
Andrew Smith & Robert Wright
Business History Review, Winter 2021, Pages 739-764
Since 2008, academics and policymakers have frequently debated why bond rating agencies such as Moody's, S&P, and Fitch enjoy considerable power and influence. The 2008 financial crisis focused our attention on the bond rating agencies that had previously categorized mortgage-backed securities as investment grade. Scholars have attributed the power enjoyed by the rating agencies to regulations that confer a privileged status on those agencies that are designated as nationally recognized statistical rating organizations (NRSROs) by the U.S. Securities and Exchange Commission (SEC). While these authors mention in passing that the relevant regulation went into effect in 1975, none has conducted archival research to examine why this regulation was introduced at that time. This article is the first historical investigation of the creation of this crucial regulation, which entrenched the concept of the NRSRO in federal securities law. It shows that the SEC mandated the use of NRSRO-created ratings even though SEC officials vigorously debated whether it was wise for the commission to endorse ratings produced by agencies that operate on the basis of the controversial issuer-pay model. This article contributes to our understanding of the SEC's role in the development of the distinctive features of American capitalism.
A Star Is Born: The Relationship Between Performance and Achieving Status Through Certification Contests in the Context of Equity Analysts
Eugene Taeha Paik et al.
Organization Science, forthcoming
We investigate how the relationship between status and performance decouples over time by addressing two questions: (1) how performance affects the likelihood that an actor achieves high status and (2) how achieving high status affects the actor’s subsequent performance. In doing so, we focus on the role repeated certification contests play, where evaluators assess actors’ performance along particular dimensions and confer high status on the contest winners. Using the context of sell-side (brokerage) equity analysts and the “All-Star” list from Institutional Investor magazine, we first investigate whether analysts who make the All-Star list are more likely to produce accurate and/or independent forecasts. Then, we investigate analyst performance after recent and multiple wins. Our results demonstrate the decoupling of status and performance over time and the roles played by both the high-status actor and the social evaluators conferring their status. Whereas analyst performance increases the likelihood of being designated an All-Star, recent and multiple All-Star designations differentially affect both how subsequent performance is assessed, and how the All-Star analysts subsequently perform. In the short term, achieving high status can increase performance and solidify an analyst’s status position; however, in the long term, it can lead to lower performance and eventually result in status loss, which further erodes performance.