Presidential Address: Social Transmission Bias in Economics and Finance
Pages: 1779-1831 | Published: 5/2020 | DOI: 10.1111/jofi.12906 | Cited by: 130
DAVID HIRSHLEIFER
I discuss a new intellectual paradigm, social economics and finance—the study of the social processes that shape economic thinking and behavior. This emerging field recognizes that people observe and talk to each other. A key, underexploited building block of social economics and finance is social transmission bias: systematic directional shift in signals or ideas induced by social transactions. I use five “fables” (models) to illustrate the novelty and scope of the transmission bias approach, and offer several emergent themes. For example, social transmission bias compounds recursively, which can help explain booms, bubbles, return anomalies, and swings in economic sentiment.
Political Connections and the Informativeness of Insider Trades
Pages: 1833-1876 | Published: 4/2020 | DOI: 10.1111/jofi.12899 | Cited by: 74
ALAN D. JAGOLINZER, DAVID F. LARCKER, GAIZKA ORMAZABAL, DANIEL J. TAYLOR
We analyze the trading of corporate insiders at leading financial institutions during the 2007 to 2009 financial crisis. We find strong evidence of a relation between political connections and informed trading during the period in which Troubled Asset Relief Program (TARP) funds were disbursed, and that the relation is most pronounced among corporate insiders with recent direct connections. Notably, we find evidence of abnormal trading by politically connected insiders 30 days in advance of TARP infusions, and that these trades anticipate the market reaction to the infusion. Our results suggest that political connections can facilitate opportunistic behavior by corporate insiders.
Do CEOs Matter? Evidence from Hospitalization Events
Pages: 1877-1911 | Published: 3/2020 | DOI: 10.1111/jofi.12897 | Cited by: 122
MORTEN BENNEDSEN, FRANCISCO PÉREZ‐GONZÁLEZ, DANIEL WOLFENZON
Using variation in firms’ exposure to their CEOs resulting from hospitalization, we estimate the effect of chief executive officers (CEOs) on firm policies, holding firm‐CEO matches constant. We document three main findings. First, CEOs have a significant effect on profitability and investment. Second, CEO effects are larger for younger CEOs, in growing and family‐controlled firms, and in human‐capital‐intensive industries. Third, CEOs are unique: the hospitalization of other senior executives does not have similar effects on the performance. Overall, our findings demonstrate that CEOs are a key driver of firm performance, which suggests that CEO contingency plans are valuable.
Pages: 1913-1964 | Published: 6/2020 | DOI: 10.1111/jofi.12903 | Cited by: 303
JOHN M. GRIFFIN, AMIN SHAMS
This paper investigates whether Tether, a digital currency pegged to the U.S. dollar, influenced Bitcoin and other cryptocurrency prices during the 2017 boom. Using algorithms to analyze blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month‐ends. Rather than demand from cash investors, these patterns are most consistent with the supply‐based hypothesis of unbacked digital money inflating cryptocurrency prices.
What Matters to Individual Investors? Evidence from the Horse's Mouth
Pages: 1965-2020 | Published: 3/2020 | DOI: 10.1111/jofi.12895 | Cited by: 89
JAMES J. CHOI, ADRIANA Z. ROBERTSON
We survey a representative sample of U.S. individuals about how well leading academic theories describe their financial beliefs and decisions. We find substantial support for many factors hypothesized to affect portfolio equity share, particularly background risk, investment horizon, rare disasters, transactional factors, and fixed costs of stock market participation. Individuals tend to believe that past mutual fund performance is a good signal of stock‐picking skill, actively managed funds do not suffer from diseconomies of scale, value stocks are safer and do not have higher expected returns, and high‐momentum stocks are riskier and do have higher expected returns.
Pages: 2021-2053 | Published: 4/2020 | DOI: 10.1111/jofi.12902 | Cited by: 23
GUILLAUME VUILLEMEY
I study a contracting innovation that suddenly insulated traders of hedging contracts against counterparty risk: central clearing counterparties (CCPs) for derivatives. The first CCP was created in Le Havre (France) in 1882, in the coffee futures market. Using triple difference‐in‐differences estimation, I show that central clearing changed the geography of trade flows Europe‐wide, to the benefit of Le Havre. Inspecting the mechanism using trader‐level data, I find that the CCP solved both a “missing market” problem and adverse selection issues. Central clearing also facilitated entry of new traders in the market. The successful contracting innovation quickly spread to other exchanges.
Informational Frictions and the Credit Crunch
Pages: 2055-2094 | Published: 5/2020 | DOI: 10.1111/jofi.12900 | Cited by: 38
OLIVIER DARMOUNI
In this paper, I estimate the magnitude of an informational friction limiting credit reallocation to firms during the 2007 to 2009 financial crisis. Because lenders rely on private information when deciding which relationship to end, borrowers looking for a new lender are adversely selected. I show how to separately identify private information from information common to all lenders but unobservable to the econometrician by using bank shocks within a discrete choice model of relationships. Quantitatively, these informational frictions appear to be too small to explain the credit crunch in the U.S. syndicated corporate loan market.
Debt Contracting on Management
Pages: 2095-2137 | Published: 3/2020 | DOI: 10.1111/jofi.12893 | Cited by: 14
BRIAN AKINS, DAVID DE ANGELIS, MACLEAN GAULIN
Change of management restrictions (CMRs) in loan contracts give lenders explicit ex ante control rights over managerial retention and selection. This paper shows that lenders use CMRs to mitigate risks arising from CEO turnover, especially those related to the loss of human capital and replacement uncertainty, thereby providing evidence that human capital risk affects debt contracting. With a CMR in place, the likelihood of CEO turnover decreases by more than half, and future firm performance improves when retention frictions are important, suggesting that lenders can influence managerial turnover, even outside of default states, and help the borrower retain talent.
Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy
Pages: 2139-2178 | Published: 4/2020 | DOI: 10.1111/jofi.12896 | Cited by: 49
FABIO SCHIANTARELLI, MASSIMILIANO STACCHINI, PHILIP E. STRAHAN
Italian firms delay payment to banks weakened by past loan losses. Exploiting Credit Register data, we fully absorb borrower fundamentals with firm‐quarter effects. Identification therefore reflects firm choices to delay payment to some banks, depending on their health. This selective delay occurs more where legal enforcement of collateral recovery is slow. Poor enforcement encourages borrowers not to pay when the value of their bank relationship comes into doubt. Selective delays occur even by firms able to pay all lenders. Credit losses in Italy have thus been worsened by the combination of weak banks and weak legal enforcement.
Understanding Systematic Risk: A High‐Frequency Approach
Pages: 2179-2220 | Published: 5/2020 | DOI: 10.1111/jofi.12898 | Cited by: 58
MARKUS PELGER
Based on a novel high‐frequency data set for a large number of firms, I estimate the time‐varying latent continuous and jump factors that explain individual stock returns. The factors are estimated using principal component analysis applied to a local volatility and jump covariance matrix. I find four stable continuous systematic factors, which can be well approximated by a market, oil, finance, and electricity portfolio, while there is only one stable jump market factor. The exposure of stocks to these risk factors and their explained variation is time‐varying. The four continuous factors carry an intraday risk premium that reverses overnight.
Cash Flow News and Stock Price Dynamics
Pages: 2221-2270 | Published: 6/2020 | DOI: 10.1111/jofi.12901 | Cited by: 20
DAVIDE PETTENUZZO, RICCARDO SABBATUCCI, ALLAN TIMMERMANN
We develop a new approach to modeling dynamics in cash flows extracted from daily firm‐level dividend announcements. We decompose daily cash flow news into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow component is a highly significant predictor of future growth in dividends and consumption. Using a log‐linearized present value model, we show that news about the persistent dividend growth component predicts stock returns consistent with asset pricing constraints implied by this model. News about the daily dividend growth process also helps explain concurrent return volatility and the probability of jumps in stock returns.
Option Profit and Loss Attribution and Pricing: A New Framework
Pages: 2271-2316 | Published: 3/2020 | DOI: 10.1111/jofi.12894 | Cited by: 18
PETER CARR, LIUREN WU
This paper develops a new top‐down valuation framework that links the pricing of an option investment to its daily profit and loss attribution. The framework uses the Black‐Merton‐Scholes option pricing formula to attribute the short‐term option investment risk to variation in the underlying security price and the option's implied volatility. Taking risk‐neutral expectation and demanding no dynamic arbitrage result in a pricing relation that links an option's fair implied volatility level to the underlying volatility level with corrections for the implied volatility's own expected direction of movement, its variance, and its covariance with the underlying security return.
Pages: 2320-2321 | Published: 7/2020 | DOI: 10.1111/jofi.12670 | Cited by: 0