Speculative fever: Investor contagion in the housing bubble
| Authors | Bayer, Mangum, Roberts |
| Journal | American Economic Review |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Historical anecdotes abound of new investors being drawn into a booming asset market, only to suffer when the market turns. While the role of investor contagion in asset bubbles has been explored extensively in the theoretical literature, causal empirical evidence on the topic is much rarer. This paper studies the recent boom and bust in the US housing market and establishes that many novice investors entered the market as a direct result of observing investing activity of multiple forms in their own neighborhoods and that "infected" investors performed poorly relative to other investors along several dimensions. |
| URL | https://doi.org/10.1257/aer.20171611 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes |
Does firm investment respond to peers' investment?
| Authors | Bustamante, Fresard |
| Journal | Management Science |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks. |
| Keywords | Investment, peer effect, competition, agglomeration economies |
| URL | https://doi.org/10.1287/mnsc.2020.3695 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases | Theory |
Negative peer disclosure
| Authors | Cao, Fang, Lei |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | This paper provides first evidence of negative peer disclosure (NPD), an emerging corporate strategy to publicize adverse news of industry peers on social media. Consistent with NPDs being implicit positive self-disclosures, disclosing firms experience a two-day abnormal return of 1.6%-1.7% over the market and industry. Further exploring the benefits and costs of such disclosures, we find that NPD propensity increases with the degree of product market rivalry and technology proximity and disclosing firms outperform nondisclosing peers in the product markets in the year following NPDs. These results rationalize peer disclosure and extend the scope of the literature beyond self-disclosure. |
| Keywords | Peer disclosure, spillover, product market rivalry, technology proximity, social media |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X21000404 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Media and Textual Analysis |
Regressive mortgage credit redistribution in the post-crisis era
| Authors | D'Acunto, Rossi |
| Journal | Review of Financial Studies |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We document four secular trends about U.S. mortgage origination by traditional and FinTech lenders after the 2008-2009 financial crisis. First, since 2011, the overall number, size, and approval rate of small and medium-sized loans have been decreasing over time, relative to large loans. Second, the largest lenders redistribute their lending the most. Third, this loan-size redistribution of credit increases in the size of the lender. Fourth, the effects are stronger for mortgages further away from the conforming loan limit(s) in both directions. We argue that the supply of credit drives these secular trends, and we assess several potential economic mechanisms. |
| Keywords | Redistribution of mortgage credit, financial regulation reforms, supply-side forces, post-crisis era |
| URL | https://doi.org/10.1093/rfs/hhab008 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Extrapolative beliefs in the cross-section: What can we learn from the crowds?
| Authors | Da, Huang, Jin |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Using novel data from a crowdsourcing platform for ranking stocks, we investigate how investors form expectations about stock returns over the next week. We find that investors extrapolate from stocks' recent past returns, with more weight on more recent returns, especially when recent returns are negative, salient, or from a dispersed cross-section. Such extrapolative beliefs are stronger among nonprofessionals and large stocks. Moreover, consensus rankings negatively predict returns over the next week, more so among stocks with low institutional ownership and a high degree of extrapolation. A trading strategy that sorts stocks on investor beliefs generates an economically significant profit. |
| Keywords | Return extrapolation, beliefs in the cross-section, expectation formation |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X20302786 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Media and Textual Analysis |
Social transmission bias and investor behavior
| Authors | Han, Hirshleifer, Walden |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We offer a new social approach to investment decision making and asset prices. Investors discuss their strategies and convert others to their strategies with a probability that increases in investment returns. The conversion rate is shown to be convex in realized returns. Unconditionally, active strategies (e.g., high variance and skewness) dominate, although investors have no inherent preference for these characteristics. The model has strong predictions for how the adoption of active strategies depends on investors's social networks. In contrast with nonsocial approaches, sociability, self-enhancing transmission, and other features of the communication process determine the popularity and pricing of active investment strategies. |
| URL | https://doi.org/10.1017/S0022109021000077 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Social Transmission Biases | Theory |
The rate of communication
| Authors | Huang, Hwang, Lou |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We study the transmission of financial news and opinions through social interactions among retail investors in the United States. We identify a series of plausibly exogenous shocks, which cause "treated investors" to trade abnormally. We then trace the "contagion" of abnormal trading activity from the treated investors to their neighbors and their neighbors' neighbors. Coupled with methodology drawn from epidemiology, our setting allows us to estimate the rate of communication and how it varies with the characteristics of the underlying investor population. |
| Keywords | Social interaction, investor communication, information diffusion |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X21001276?via%3Dihub |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Partisan professionals: Evidence from credit rating analysts
| Authors | Kempf, Tsoutsoura |
| Journal | Journal of Finance |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Partisan perception affects the actions of professionals in the financial sector. Linking credit rating analysts to party affiliations from voter records, we show that analysts not affiliated with the U.S. president's party downward-adjust corporate credit ratings more frequently. Since we compare analysts with different party affiliations covering the same firm in the same quarter, differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results show that analysts' partisan perception has price effects and may influence firms' investment policies. |
| Keywords | Analysts, credit ratings, partisanship, polarization, belief disagreement, Trump, elections |
| URL | https://doi.org/10.1111/jofi.13083 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical |
Friends with bankruptcy protection benefits
| Authors | Kleiner, Stoffman, Yonker |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We show information spillovers limit the effectiveness of targeted debt relief programs. We study individuals who learn about the likelihood of debt relief from the recent experiences of workplace peers filing for bankruptcy protection. Peers granted bankruptcy can discharge debts, while peers facing dismissal lose all protections. Exploiting the random assignment of judges to bankruptcy cases, we determine that individuals with a "dismissed peer" are significantly less likely to file for bankruptcy or enter foreclosure. We highlight a novel channel relating social networks to household finances and identify additional costs of granting individual debt relief imposed on lenders. |
| Keywords | Debt relief, personal bankruptcy, foreclosure, peer effects, social networks, bankruptcy juadges, random assignment |
| URL | https://doi.org/10.1016/j.jfineco.2020.08.003 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Social proximity to capital: Implications for investors and firms
| Authors | Kuchler, Li, Peng, Stroebel, Zhou |
| Journal | Review of Financial Studies |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties but find no evidence that these investments earn a differential return. Firms in regions with stronger social ties to locations with many institutional investors have higher valuations and liquidity. These effects are largest for small firms with little analyst coverage, suggesting that the investors' behavior is explained by their increased awareness of firms in socially proximate locations. Our results highlight that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes. |
| Keywords | Social networks, Social Connectedness Index, institutional investors |
| URL | https://doi.org/10.1093/rfs/hhab111 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
Social finance
| Authors | Kuchler, Stroebel |
| Journal | Annual Review of Financial Economics |
| Year | 2021 |
| Type | Published Paper | Literature Review Paper |
| Abstract | We review an empirical literature that studies the role of social interactions in driving economic and financial decision-making. We first summarize recent work that documents an important role of social interactions in explaining household decisions in housing and mortgage markets. This evidence shows, for example, that there are large peer effects in mortgage refinancing decisions and that individuals's beliefs about the attractiveness of housing market investments are affected by the recent house price experiences of their friends. We also summarize recent work showing that social interactions affect the stock market investments of both retail and professional investors as well as household financial decisions such as retirement savings, borrowing, and default. Along the way, we describe a number of easily accessible recent data sets for the study of social interactions in finance, including the Social Connectedness Index, which measures the frequency of Facebook friendship links across geographies. We conclude by outlining several promising directions for further research in the field of social finance. |
| Keywords | Social networks, peer effects, financial decision-making, social dynamics, belief contagion |
| URL | https://doi.org/10.1146/annurev-financial-101320-062446 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
The trading response of individual investors to local bankruptcies
| Authors | Laudenbach, Loos, Pirschel, Wohlfart |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We examine how adverse local experiences that are uninformative of future returns affect households' investment behavior in the short term. Using data from a German online brokerage and a survey we show that retail investors sharply reduce risk taking in response to nearby firm bankruptcies. Adjustments in risk taking occur through immediate and transitory increases in trading, and seem to work through more pessimistic expectations about aggregate stock returns and increased risk aversion. Changes in background risks or wealth effects cannot explain our findings. Extrapolation from local experiences to aggregate expectations is inconsistent with optimal use of full or limited information. |
| Keywords | Individual investors, risk-taking, trading, experiences |
| URL | https://doi.org/10.1016/j.jfineco.2021.06.033 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Does common ownership really increase firm coordination?
| Authors | Lewellen, Lowry |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | A growing number of studies suggest that common ownership caused cooperation among firms to increase and competition to decrease. We take a closer look at four approaches used to identify these effects. We find that the effects that some studies have attributed to common ownership are caused by other factors, such as differential responses of firms (or industries) to the 2008 financial crisis. We propose a modification to one of the previously used empirical approaches that is less sensitive to these issues. Using this to re-evaluate the link between common ownership and firm outcomes, we find little robust evidence that common ownership affects firm behavior. |
| Keywords | Common ownership, institutional ownership, corporate governance |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X21000982 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Superstition and farmers' life insurance spending
| Authors | Liu, Zhang, Chen, Yang |
| Journal | Economics Letters |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Superstition is prevalent in rural areas, yet very few studies examine whether it affects rural households' economic decisions. In this paper, we investigate the impact of "zodiac year" superstition on Chinese rural households' life insurance spending. We find a statistically significant 18.5% increase in life insurance expenditure during the head's zodiac year. Such a boost is only significant in the zodiac year and does not exist in non-zodiac years. Our study provides novel evidence that rural households would hedge "bad luck" by self-insurance when bearing superstitious beliefs. |
| Keywords | Superstition, insurance, rural household |
| URL | https://doi.org/10.1016/j.econlet.2021.109975 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Peer effects in networks: A survey
| Authors | Bramoulle, Djebbari, Fortin |
| Journal | Annual Review of Economics |
| Year | 2020 |
| Type | Published Paper | Literature Review Paper |
| Abstract | We survey the recent, fast-growing literature on peer effects in networks. An important recurring theme is that the causal identification of peer effects depends on the structure of the network itself. In the absence of correlated effects, the reflection problem is generally solved by network interactions even in nonlinear, heterogeneous models. By contrast, microfoundations are generally not identified.We discuss and assess the various approaches developed by economists to account for correlated effects and network endogeneity in particular. We classify these approaches in four broad categories: random peers, random shocks, structural endogeneity, and panel data. We review an emerging literature relaxing the assumption that the network is perfectly known. Throughout, we provide a critical reading of the existing literature and identify important gaps and directions for future research. |
| Keywords | Social networks, peer effects, identification, causal effects, randomization, measurement errors |
| URL | https://www.annualreviews.org/doi/pdf/10.1146/annurev-economics-020320-033926 |
| Tags | Social Network Structure |
Harnessing the wisdom of crowds
| Authors | Da, Huang |
| Journal | Management Science |
| Year | 2020 |
| Type | Published Paper |
| Abstract | When will a large group provide an accurate answer to a question involving quantity estimation? We empirically examine this question on a crowd-based corporate earnings forecast platform (Estimize.com). By tracking user activities, we monitor the amount of public information a user views before making an earnings forecast. We find that the more public information users view, the less weight they put on their own private information. Although this improves the accuracy of individual forecasts, it reduces the accuracy of the group consensus forecast because useful private information is prevented from entering the consensus. To address endogeneity concerns related to a user's information acquisition choice, we collaborate with Estimize.com to run experiments that restrict the information available to randomly selected stocks and users. The experiments confirm that "independent" forecasts result in a more accurate consensus. Estimize.com was convinced to switch to a "blind" platform from November 2015 on. The findings suggest that the wisdom of crowds can be better harnessed by encouraging independent voices from among group members and that more public information disclosure may not always improve group decision making. |
| Keywords | Wisdom of crowds, herding, naive learning, social learning, group decision making, earnings forecast |
| URL | https://pubsonline.informs.org/doi/10.1287/mnsc.2019.3294 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
What you see is all there is
| Authors | Enke |
| Journal | Quarterly Journal of Economics |
| Year | 2020 |
| Type | Published Paper |
| Abstract | News reports and communication are inherently constrained by space, time, and attention. As a result, news sources often condition the decision of whether to share a piece of information on the similarity between the signal and the prior belief of the audience, which generates a sample selection problem. This article experimentally studies how people form beliefs in these contexts, in particular the mechanisms behind errors in statistical reasoning. I document that a substantial fraction of experimental participants follows a simple "what you see is all there is" heuristic, according to which participants exclusively consider information that is right in front of them, and directly use the sample mean to estimate the population mean. A series of treatments aimed at identifying mechanisms suggests that for many participants, unobserved signals do not even come to mind. I provide causal evidence that the frequency of such incorrect mental models is a function of the computational complexity of the decision problem. These results point to the context dependence of what comes to mind and the resulting errors in belief updating. |
| Keywords | Bounded rationality, mental models, complexity, beliefs |
| URL | https://doi.org/10.1093/qje/qjaa012 |
| Tags | Experimental / Survey-Based Empirical | Social Transmission Biases |
To be or not to be your authentic self? Catering to others' preferences hinders performance
| Authors | Gino, Sezer, Huanga |
| Journal | Organizational Behavior and Human Decision Processes |
| Year | 2020 |
| Type | Published Paper |
| Abstract | When approaching interpersonal first meetings (e.g., job interviews), people often cater to the target's interests and expectations to make a good impression and secure a positive outcome such as being offered the job (pilot study). This strategy is distinct from other approaches identified in prior impression management research (Studies 1A, 1B and 1C), and does not produce the benefits people expect. In a field study in which entrepreneurs pitched their ideas to potential investors (Study 2), catering harmed investors' evaluations, while being authentic improved them. People experience greater anxiety and instrumentality when they cater to another person's preferences than when they behave authentically (Studies 3A and 3B). Compared to behaving authentically or to a control condition, catering harms performance because trying to anticipate and fulfill others' preferences feels instrumental and increases anxiety (Studies 4 and 5). Taken together, these results suggest that although people believe using catering in interpersonal first meetings will lead to successful outcomes, the opposite is true: catering creates undesirable feelings of instrumentality for the caterer, increases anxiety, and ultimately hinders performance. |
| Keywords | Authenticity, catering, honesty, selection, anxiety, impression management |
| URL | https://doi.org/10.1016/j.obhdp.2020.01.003 |
| Tags | Experimental / Survey-Based Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases |
Financial literacy externalities
| Authors | Haliassos, Karabulut, Jansson |
| Journal | Review of Financial Studies |
| Year | 2020 |
| Type | Published Paper |
| Abstract | This paper uses unique administrative data and a quasi-field experiment of exogenous allocation to apartments in Sweden to estimate medium- and longer-run effects on financial behavior from exposure to financially literate neighbors. It contributes evidence of causal impact of financial literacy and points to a social multiplier of effective programs to enhance it. Exposure promotes saving in private retirement accounts and stockholding, especially when neighbors have economics or business education, but only for educated or male-headed households. Findings point to relevant knowledge transfer through social interactions rather than to labor market or other channels linked to local economic conditions. |
| URL | https://doi.org/10.1093/rfs/hhz076 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Presidential address: Social transmission bias in economics and finance
| Authors | Hirshleifer |
| Journal | Journal of Finance |
| Year | 2020 |
| Type | Published Paper |
| Abstract | 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. |
| Keywords | Social transmission bias, social economics, social finance, behavioral economics, behavioral finance, social networks, social learning, information percolation, biased percolation, epidemiology, visibility bias, self-enhancing transmission bias, simplistic thinking, memes, cultural evolution |
| URL | https://onlinelibrary.wiley.com/doi/pdf/10.1111/jofi.12906 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases | Theory |