The Journal of Finance

Contracting in Peer Networks

Published: 7/28/2023,  Volume: 78,  Issue: 5  |  DOI: 10.1111/jofi.13260  |  Cited by: 21

PETER M. DEMARZO, RON KANIEL

We consider multiagent multifirm contracting when agents benchmark their wages to those of their peers, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals, a “rat race” emerges: agents are more productive, with effort that can exceed the first best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.

Individual Investor Trading and Stock Returns

Published: 1/10/2008,  Volume: 63,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01316.x  |  Cited by: 800

RON KANIEL, GIDEON SAAR, SHERIDAN TITMAN

This paper investigates the dynamic relation between net individual investor trading and short‐horizon returns for a large cross‐section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk‐averse individuals provide liquidity to meet institutional demand for immediacy.

The High‐Volume Return Premium

Published: 6/2001,  Volume: 56,  Issue: 3  |  DOI: 10.1111/0022-1082.00349  |  Cited by: 688

Simon Gervais, Ron Kaniel, Dan H. Mingelgrin

The idea that extreme trading activity contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a day or a week tend to appreciate (depreciate) over the course of the following month. We argue that this high‐volume return premium is consistent with the idea that shocks in the trading activity of a stock affect its visibility, and in turn the subsequent demand and price for that stock. Return autocorrelations, firm announcements, market risk, and liquidity do not seem to explain our results.

Diversification as a Public Good: Community Effects in Portfolio Choice

Published: 8/2004,  Volume: 59,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2004.00676.x  |  Cited by: 133

Peter M. Demarzo, Ron Kaniel, Ilan Kremer

Within a rational general equilibrium model in which agents care only about personal consumption, we consider a setting in which, due to borrowing constraints, individuals endowed with local resources underparticipate in financial markets. As a result, investors compete for local resources through their portfolio choices. Even with complete financial markets and no aggregate risk, agents may herd into risky portfolios. This yields a Pareto‐dominated outcome as agents introduce “community” risk unrelated to fundamentals. Moreover, if some agents are behaviorally biased, or cannot completely diversify their holdings, rational agents may choose more extreme portfolios and amplify the effect.

Individual Investor Trading and Return Patterns around Earnings Announcements

Published: 3/27/2012,  Volume: 67,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2012.01727.x  |  Cited by: 377

RON KANIEL, SHUMING LIU, GIDEON SAAR, SHERIDAN TITMAN

This paper provides evidence of informed trading by individual investors around earnings announcements using a unique data set of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose abnormal returns following the event into information and liquidity provision components, and show that about half of the returns can be attributed to private information. We also find that individuals trade in both return‐contrarian and news‐contrarian manners after earnings announcements. The latter behavior has the potential to slow the adjustment of prices to earnings news.

Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

Published: 4/2002,  Volume: 57,  Issue: 2  |  DOI: 10.1111/1540-6261.00438  |  Cited by: 312

Mark M. Carhart, Ron Kaniel, David K. Musto, Adam V. Reed

We present evidence that fund managers inflate quarter‐end portfolio prices with last‐minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large‐cap funds to well over 2 percent for small‐cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance.

Corporate Investment and Asset Price Dynamics: Implications for the Cross‐section of Returns

Published: 12/2004,  Volume: 59,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2004.00709.x  |  Cited by: 577

MURRAY CARLSON, ADLAI FISHER, RON GIAMMARINO

We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999), but we introduce to the investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book‐to‐market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data.

Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance

Published: 5/16/2006,  Volume: 61,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2006.00865.x  |  Cited by: 275

MURRAY CARLSON, ADLAI FISHER, RON GIAMMARINO

We present a rational theory of SEOs that explains a pre‐issuance price run‐up, a negative announcement effect, and long‐run post‐issuance underperformance. When SEOs finance investment in a real options framework, expected returns decrease endogenously because growth options are converted into assets in place. Regardless of their risk, the new assets are less risky than the options they replace. Although both size and book‐to‐market effects are present, standard matching procedures fail to fully capture the dynamics of risk and expected return. We calibrate the model and show that it closely matches the primary features of SEO return dynamics.