The Journal of Finance

Economic Links and Predictable Returns

Published: 07/19/2008   |   DOI: 10.1111/j.1540-6261.2008.01379.x

LAUREN COHEN, ANDREA FRAZZINI

This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. Using a data set of firms' principal customers to identify a set of economically related firms, we show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long–short equity strategy based on this effect yields monthly alphas of over 150 basis points.

Attracting Flows by Attracting Big Clients

Published: 09/28/2009   |   DOI: 10.1111/j.1540-6261.2009.01496.x

LAUREN COHEN, BRENO SCHMIDT

We explore a new channel for attracting inflows using a unique data set of corporate 401(k) retirement plans and their mutual fund family trustees. Families secure substantial inflows by being named trustee. We find that family trustees significantly overweight, and are reluctant to sell, their 401(k) client firm's stock. Trustee overweighting is more pronounced when the relationship is more valuable to the trustee family, and is concentrated in those funds receiving the greatest benefit from the inflows. We quantify this flow benefit and find that inclusion in the 401(k) plan has an economically and statistically large, positive effect on inflows.

Decoding Inside Information

Published: 05/21/2012   |   DOI: 10.1111/j.1540-6261.2012.01740.x

LAUREN COHEN, CHRISTOPHER MALLOY, LUKASZ POMORSKI

Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable “routine” insider trading that is not informative about firms’ futures. A portfolio strategy that focuses solely on the remaining “opportunistic” traders yields value‐weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.

Lazy Prices

Published: 01/28/2020   |   DOI: 10.1111/jofi.12885

LAUREN COHEN, CHRISTOPHER MALLOY, QUOC NGUYEN

Using the complete history of regular quarterly and annual filings by U.S. corporations, we show that changes to the language and construction of financial reports have strong implications for firms’ future returns and operations. A portfolio that shorts “changers” and buys “nonchangers” earns up to 188 basis points per month in alpha (over 22% per year) in the future. Moreover, changes to 10‐Ks predict future earnings, profitability, future news announcements, and even future firm‐level bankruptcies. Unlike typical underreaction patterns, we find no announcement effect, suggesting that investors are inattentive to these simple changes across the universe of public firms.

Sell‐Side School Ties

Published: 07/15/2010   |   DOI: 10.1111/j.1540-6261.2010.01574.x

LAUREN COHEN, ANDREA FRAZZINI, CHRISTOPHER MALLOY

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational background of sell‐side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre‐Reg FD, this school‐tie return premium is 9.36% per year, while post‐Reg FD it is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the school‐tie premium is large and significant over the entire sample period.

Don't Take Their Word for It: The Misclassification of Bond Mutual Funds

Published: 04/09/2021   |   DOI: 10.1111/jofi.13023

HUAIZHI CHEN, LAUREN COHEN, UMIT G. GURUN

We provide evidence that bond fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. The problem is widespread, resulting in up to 31.4% of funds being misclassified with safer profiles, compared to their true, publicly reported holdings. “Misclassified funds”—those that hold risky bonds but claim to hold safer bonds—appear to on‐average outperform lower risk funds in their peer groups. Within category groups, misclassified funds receive more Morningstar stars and higher investor flows. However, when we correctly classify them based on actual risk, these funds are mediocre performers.

Resident Networks and Corporate Connections: Evidence from World War II Internment Camps

Published: 03/01/2016   |   DOI: 10.1111/jofi.12407

LAUREN COHEN, UMIT G. GURUN, CHRISTOPHER MALLOY

Using customs and port authority data, we show that firms are significantly more likely to trade with countries that have a large resident population near their firm headquarters, and that these connected trades are their most valuable international trades. Using the formation of World War II Japanese internment camps to isolate exogenous shocks to local ethnic populations, we identify a causal link between local networks and firm trade. Firms are also more likely to acquire target firms, and report increased segment sales, in connected countries. Our results point to a surprisingly large role of immigrants as economic conduits for firms.

Supply and Demand Shifts in the Shorting Market

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01269.x

LAUREN COHEN, KARL B. DIETHER, CHRISTOPHER J. MALLOY

Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.