The long-lasting effects of living under communism on attitudes towards financial markets
| Authors | Laudenbach, Malmendier, Niessen-Ruenzi |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We analyze the long-term effects of living under communism and its anticapitalist doctrine on households' financial investment decisions and attitudes towards financial markets. Utilizing comprehensive German brokerage data and bank data, we show that, decades after Reunification, East Germans still invest significantly less in the stock market than West Germans. Consistent with communist friends-and-foes propaganda, East Germans are more likely to hold stocks of companies from communist countries (China, Russia, Vietnam) and of state-owned companies, and are unlikely to invest in American companies and the financial industry. Effects are stronger for individuals exposed to "positive emotional tagging", e. g., those living in celebrated showcase cities. Effects reverse for individuals with negative experiences, e.g., environmental pollution, religious oppression, or lack of (Western) TV entertainment. Election years trigger further divergence of East and West Germans. We provide evidence of negative welfare consequences due to less diversified portfolios, higher-fee products, and lower risk-adjusted returns. |
| Keywords | Capital markets, communism, memory, emotional tagging, stock-market participation |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3526926 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
The politics of management earnings expectations
| Authors | Liu, Na, Nagar, Yan |
| Year | 2022 |
| Type | Working Paper |
| Abstract | This study documents that CEOs' expectations about firm performance are more negatively biased in periods when the White House is governed by the political party that the CEOs did not contribute to, relative to periods when the White House is occupied by the CEOs' party. This negative bias holds as strongly toward the end of the year, suggesting that CEOs do not revise their priors in response to new information. The results are stronger for firms whose performance is more correlated with the general economic conditions, consistent with managers' biased beliefs about the economy driving the results. Upon facing an opposing presidency, the sensitivity of CEOs' capital investments to cash flow decreases, relative to their politically aligned years. By contrast, actual firm performance is largely unaffected. Overall, our results highlight the importance of political partisan bias in shaping |
| Keywords | Managerial biases, partisan conflict, earnings expectations, CEO earnings forecasts |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3950975&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Manager / Firm Behavior |
Fifty shades of hatred and discontent - varieties of anti-finance discourses on the European Twitter (France, Germany, Italy, Spain and the UK)
| Authors | Massoc |
| Year | 2022 |
| Type | Working Paper |
| Abstract | Are we in a new "Polanyian moment"? If we are, it is essential to examine how "spontaneous" and punctual expressions of discontent at the individual level may give rise to collective discourses driving social and political change. It is also important to examine whether and how the framing of these discourses may vary across political economies. This paper contributes to this endeavor with the analysis of anti-finance discourses on Twitter in France, Germany, Italy, Spain and the UK between 2019 and 2020. This paper presents three main findings. First, the analysis shows that, more than ten years after the financial crisis, finance is still a strong catalyzer of political discontent. Second, it shows that there are important variations in the dominant framing of public anti-finance discourses on social media across European political economies. If the antagonistic "us versus them" is prominent in all the cases, the identification of who "us" and "them" are, vary significantly. Third, it shows that the presence of far-right tropes in the critique of finance varies greatly from virtually inexistent to a solid minority of statements. |
| Keywords | Finance, opinion, social media, discourse analysis |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4008884&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Media and Textual Analysis |
Social Networks, trading, and liquidity
| Authors | Peng, Wang, Zhou |
| Year | 2022 |
| Type | Working Paper | Literature Review Paper |
| Abstract | The recent meme stock saga has drawn attention to the growing role of social networks in capital markets. In this paper, the authors summarize the latest research that uses large scale, representative, real-world social network data to study social networks' influences on trading, liquidity, and valuations of stocks. Institutional investors invest more heavily in stocks if there are strong social ties between the geographic locations of the institution's headquarters and the firm's headquarters. Further, a firm's social ties to large institutional investors reduce its cost of capital, increase its valuation, and strengthen its liquidity. Social networks help to timely disseminate important news releases into prices, but also trigger belief divergence and generate persistent excess trading. Moreover, social interactions can amplify investors' behavioral biases and contribute to retail investors' attraction to lottery-type stocks. The authors provide additional examples to further illustrate why the roles of social networks are of particular importance to market participants. |
| Keywords | Social networks, market liquidity |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4099114 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Theory |
Social contagion and asset prices: Reddit's self-organised bull runs
| Authors | Semenova, Winkler |
| Year | 2022 |
| Type | Working Paper |
| Abstract | This paper develops an empirical and theoretical case for how `hype' among retail investors can drive large asset price fluctuations. We use text data from discussions on WallStreetBets (WSB), an online investor forum with over eleven million followers as of February 2022, as a case study to demonstrate how retail investors influence each other, and how social behaviors impact financial markets. We document that WSB users adopt price predictions about assets (bullish or bearish) in part due to the sentiments expressed by their peers. Discussions about stocks are also self-perpetuating: narratives about specific assets spread at an increasing rate before peaking, and eventually diminishing in importance -- a pattern reminiscent of an epidemiological setting. To consolidate these findings, we develop a model for the impact of social dynamics among retail investors on asset prices. We find that the interplay between 'trend following' and 'consensus formation' determines the stability of price returns, with socially-driven investing potentially causing oscillations and cycles. Our framework helps identify components of asset demand stemming from social dynamics, which we predict using WSB data. Our predictions explain significant variation in stock market activity. These findings emphasize the role that social dynamics play in financial markets, amplified by online social media. |
| Keywords | Social media analysis, sentiment contagion, asset prices |
| URL | https://arxiv.org/abs/2104.01847 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Theory |
Influencers, inefficiency and fraud - The Bitcoin price discovery network under the microscope
| Authors | Trimborn, Chen, Chen |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We present a TriSNAR modeling framework for understanding the dynamic interactions of multiple markets for Bitcoin trading, including market efficiency, and for identifying influential exchanges in the global trading network. We are particularly interested in identifying exchanges that are market leaders. Out of 339 weeks (6.5 years of data), we identify 104 weeks in which TriSNAR provides the best MSFE out of 6 contestants and significantly outperforms all other models. Among 194 Bitcoin exchanges, we find that exchange Kraken was the leading exchange prior to the market frenzy of 2017, in particular in 2016. In addition, price discovery shows that the Bitcoin exchange networks efficiency decreased from 2015 to 2017, and increased since 2018. We analyse the relation between blockchain fund flows and influential exchanges, and observe that wealthy holders of Bitcoin transact funds to exchanges when influential exchanges arise. We investigate the finite sample and asymptotic properties of TriSNAR. Compared to alternative methods, TriSNAR outperforms in terms of accuracy and ability to discover multi-market network structures. |
| Keywords | Influencer identification, blockchain network analysis, market efficiency, structure detection, bitcoin exchanges |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4071212 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Social Network Structure | Theory |
Investor attention or investor sentiment: How social media react to ESG?
| Authors | Zhang, Xu, Hong, Chan |
| Year | 2022 |
| Type | Working Paper |
| Abstract | The ESG (environmental, social, and governance) practice has become very important in contemporary business, and it is believed to have a significant impact on firm value. However, how investors react to firms' ESG performance is still unknown. Exploiting user-generated content from a popular online investment community (Seeking Alpha) and ESG performance scores from a professional database (Sustainalytics), we first run a fixed-effect panel regression and find an overall positive relationship between ESG and investor attention but no relationship between ESG and investor sentiment. We then conduct an event-study analysis, in which we classify changes in ESG performance as upgrade and downgrade events and find that the significant relationship between ESG and investor attention holds for the downgrade events but not for the upgrade events. We also conduct various robustness checks, on both ESG and investor attention, to rule out potential effects of other factors, such as firm size, debt, intangible assets, and profitability. Our further mechanism analysis reveals that the effect of ESG on investor attention is driven by the social and governance factors rather than the environmental factors. Our work makes both theoretical and practical contributions by identifying the nuanced effect of ESG on investors' reactions in the social media era. |
| Keywords | ESG, investor attention, investor sentiment, social media, online investment communities |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905195&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Back to the roots: Ancestral origin and mutual fund manager portfolio choice
| Authors | Ammann, Cochardt, Straumann, Weigert |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We exploit variation in the ancestries of U.S. equity mutual fund managers and show that ancestry affects portfolio decisions. Controlling for fund firm location, we find that funds overweight stocks from their managers' ancestral home countries in their non-U.S. portfolio by 132 bps or 20.34% compared with their peers. Similarly, funds overweight industries that are comparatively large in their manager's ancestral home countries. The documented ancestral biases are pervasive across fund styles and across different manager ancestries. The effect is more pronounced for funds that are less resource-constrained and for managers whose connection to their ancestral home country is more recent. Stocks linked to managers' ancestry do not outperform stocks in the same countries and industries but held by managers of other ancestry, confirming that ancestry-linked investments are not informed. |
| Keywords | Culture, home bias, mutual funds, portfolio choice, fund managers |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3879492 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
Attention, social interaction, and investor attraction to lottery stocks
| Authors | Bali, Hirshleifer, Peng, Tang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We find that among stocks dominated by retail investors, the lottery anomaly is amplified by high investor attention (proxied by high analyst coverage, salient earnings surprises, or recency of extreme positive returns) and intense social interactions (proxied by Facebook social connectedness or population density near firm headquarters). Such stocks' lottery features attract greater Google search volume and retail net buying, followed by more negative earnings surprises and lower announcement-period returns. The findings provide insight into the roles of attention and social interaction in securities markets, and support the hypothesis that these forces contribute to investor attraction to lottery stocks. |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3978401 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) |
Punished for doing good: Heuristic-based judgement and the contingent returns to company philanthropy under high uncertainty
| Authors | Ballesteros, Wry, Useem |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Companies donating in the aftermath of large-scale disasters often suffer public backlash and managers systematically fail to understand what corresponds to a donation that stakeholders perceive as contextually appropriate. We attribute this to the level of uncertainty that obscures the relative social value of a donation because accurate information about impacts is not available for months. We argue that stakeholders rely on a company's pre-disaster reputation as a heuristic to make judgments of its philanthropy. Thus, regardless of the amount of aid given, well-regarded firms obtain rents from responding first to a disaster, and this spills over to companies in the same industry that match their donations; the opposite applies to firms with an unfavorable reputation, and to those that imitate their gifts. Analyses of donations by the largest 2,000 companies worldwide to every major epidemic, natural disaster, and terrorist attack from 2007 to 2019 support this argument and show that this heuristic effect does not transfer to firms donating different amounts. The estimates survive a battery of time-varying and joint fixed effects and tests of confounders. They confirm that reputation is a stronger rent determinant than donation amount. We discuss ways to improve managerial philanthropic decisions in similar settings. |
| Keywords | Company philanthropy, reputation, disasters, heuristics, corporate social responsibility |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3919161&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Manager / Firm Behavior | Media and Textual Analysis | Theory |
Do teams alleviate or exacerbate behavioral biases? Evidence from extrapolation bias in mutual funds
| Authors | Barahona, Cassella, Jansen |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Whether teams attenuate or exacerbate the behavioral biases which are pervasive at the individual level is an open question. To address this question, we use the mutual fund industry as a laboratory. Our focus is on how return extrapolation is transmitted from individual fund managers to the team-managed funds they join. We show that teams heavily attenuate the influence of extrapolation bias on funds' trading behavior. Additional analysis reveals that this attenuation is not due to differences in investment experience, compensation contracts, workload, and investment styles between solo-managed and team-managed funds. Rather, our evidence suggests that the elicitation of team members' inner cognitive reflection can be responsible for teams' reduction in behavioral biases. Our results highlight the attenuation of the extrapolation bias as a potential benefit of team-based asset management. |
| Keywords | Behavioral biases, extrapolation, heuristics, mutual funds, teams |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3783421 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior | Theory |
Information cascades and social learning
| Authors | Bikhchandani, Hirshleifer, Tamuz, Welch |
| Year | 2021 |
| Type | Working Paper | Literature Review Paper |
| Abstract | We review the theory of information cascades and social learning. Our goal is to describe in a relatively integrated and accessible way the more important themes, insights and applications of the literature as it has developed over the last thirty years. We also highlight open questions and promising directions for further theoretical and empirical exploration. |
| Keywords | Information cascades, social learning, herding, fads, fashion, conformity, culture |
| URL | https://ssrn.com/abstract=3851678 |
| Tags | Theory |
Tacit collusion among dominant banks: Evidence from round-yard loan pricing
| Authors | Chan, Lin, Lin |
| Year | 2021 |
| Type | Working Paper |
| Abstract | While there is no apparent reason for loan spreads to cluster at certain numbers, we find that around 70% of loans have round-yard spreads (i.e., multiples of 25 basis points). We hypothesize that dominant banks implicitly collude by using the round-yards as focal pricing points when negotiating with their borrowers. The tacit collusion leads to higher spreads and total costs of the round-yard-priced loans than non-round-yard-priced loans. Consistent with our tacit collusion hypothesis, dominant banks round up rather than round down loan spreads to the multiples of yards. Moreover, round-yard pricing is more prevalent among lower-quality and non-repeat borrowers. Overall, we provide the first evidence that dominant banks use round-yard pricing as an effective tool for tacit collusion in the loan market. |
| Keywords | Tacit collusion, dominant banks, round-yard pricing, bargaining power, loan spreads, round up |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905375&dgcid=ejournal_htmlemail_behavioral:experimental:finance:ejournal_abstractlink |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Media persuasion and consumption: Evidence from the Dave Ramsey Show
| Authors | Chopra |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Can entertaining mass media programs influence individual consumption and savings decisions? I study this question by examining the impact of the Dave Ramsey Show, an iconic US radio talk show which encourages people to spend less and save more. To that end, I combine household-level expenditure records from a large scanner panel with fine-grained information about the geographic coverage of the radio show over time. Exploiting the quasi-natural experiment created by the staggered expansion of the radio show from 2004 to 2019, I find that exposure to the radio show decreases monthly household expenditures. This effect is driven by households with initially high expenditures relative to their income. In a mechanism experiment, I document that listening to the radio show has a persistent effect on people's attitudes towards consumption and debt. This suggests that attitudinal changes are a key mechanism driving behavioral change. My findings highlight the potential of entertaining mass media programs for interventions aimed at changing people's financial decisions. |
| Keywords | Consumption, debt, entertainment, edutainment, household finance, mass media, persuasion, radio, savings |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3992358 |
| Tags | Archival Empirical | Consumer Decisions | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Private communication between managers and financial analysts: evidence from taxi ride patterns in New York city
| Authors | Choy, Hope |
| Year | 2021 |
| Type | Working Paper |
| Abstract | This study constructs a novel measure that aims to capture face-to-face private communications between firm managers and sell-side analysts by mapping detailed, large-volume taxi trip records from New York City to the GPS coordinates of companies and brokerages. Consistent with earnings releases prompting needs for private communications, we observe that daily taxi ride volumes between companies and brokerages increase significantly around earnings announcement dates (EAD) and reach their peak on EAD. After controlling for an extensive set of fixed effects (firm, analyst, and year) and other potential confounding factors, we find that increases in ride volumes around EAD are negatively associated with analysts' earnings forecast errors in periods after EAD and positively associated with the profitability of recommendations issued after EAD (but these effects dissipate over longer horizons). Our results suggest that analysts may obtain a private source of information orthogonal to their pre-existing information from these in-person meetings, which may help them better understand the implications of current earnings signals for future earnings. |
| Keywords | private communications, sell-side analysts, taxis, private information, earnings forecasts, stock recommendations, profitability of stock recommendations, earnings announcements, reg FD |
| URL | https://ssrn.com/abstract=3920680 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Tesla: is now the time to invest? An examination of Tesla, social media, and its effect on stock
| Authors | Coiro |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Tesla is an American electric vehicle and clean energy company. They are based in Palo Alto, California and their product base consists of electric cars, battery energy storage, solar panels, and solar roof tiles. On an average day in 2021, Tesla stock sells for $700/share. We will review historical Tesla data and examine whether this particular stock is worth the investment. In addition to historical data, this research reviews the effect of traditional news and social media on human behavior. Exploring social media analytics, investor sentiment and behavior in hopes to gauge how these factors can impact Tesla and whether this should be taken into consideration prior to the investment. |
| Keywords | Tesla, stock market, investment, social media, investor, human behavior, clean energy, solar, electric cars |
| URL | https://ssrn.com/abstract=3908275 |
| Tags | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Similarity breeds trust: Political homophily and CEO-board communication
| Authors | Dasgupta, Guo, Ren, Shu |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We find evidence suggesting that similarity of political views between the CEO and independent directors ("political homophily") encourages the CEO to share adverse information with the board. Firms with higher political homophily have lower stock price crash risk, are more likely to divest previously acquired assets with poor announcement returns, and are more likely to recognize losses in asset value. Furthermore, the effect of political homophily is complemented by strong shareholder governance which prevents friendly board from insulating the CEO in the case of ex post negative outcomes. Our identification utilizes the exogenous variation in political beliefs associated with the entry of a conservative television network in local markets. Our findings show that a friendly board facilitates CEO-board communication which is crucial for the board to function effectively in its advisory role. |
| Keywords | Friendly board, CEO-board communication, political homophily, crash risk, corporate governance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3966173&dgcid=ejournal_htmlemail_behavioral:experimental:finance:(editor%27s:choice):ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Social Network Structure |
Waiting on a friend: Strategic learning and corporate investment
| Authors | Decaire, Wittry |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using detailed project-level data, we document a novel mechanism through which information externalities distort investment. Firms anticipate information spillover from peers' investment decisions and delay project exercise to learn from their peers' outcomes. To establish a causal interpretation of our results, we exploit local exogenous variation from the 1800s that shapes the number of peers that a firm can learn from today. The strategic learning incentive is most salient for projects with uncertain profitability, when peers' underlying assets are similar, and in environments where peers are skilled. Finally, our results suggest that the anticipation of peer information dampens aggregate investment. |
| Keywords | Real options, strategic interactions, learning, peer behavior, investment, historical data |
| URL | https://ssrn.com/abstract=3923811 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Media attention and stock categorization: an examination of stocks hyped to benefit from the Olympics
| Authors | Dechow, Lawrence, Luo, Stamenov |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We investigate whether there are temporary valuation impacts on stocks that media outlets list as involved in a major sporting event (the summer Olympics). We examine five summer Olympics and identify stocks that media outlets hype as benefiting from the Olympics (Olympic stocks). We find that Olympic stocks exhibit increases in comovement of returns after the announcement of the winning bid and declines in comovements after the games are played, consistent with the Olympics being used by investors as a category for investment. Furthermore, Olympic stock returns outperform their matched counterparts over this time period. If the comovement and valuation benefits are due to changes in underlying economics then we expect to observe corresponding increases in comovements of fundamentals and improvements in profitability. However, we find no observable changes in fundamental comovements or profitability. Consistent with investor sentiment driving the categorization, we find that Olympic firms with a greater retail investor presence have stronger comovements effects; and trading volume and volatility are abnormally high for Olympic firms on days where media outlets have stories linking the firm to the Olympic games. To clarify event-based categorization occurs in other settings where media outlets classify stocks for investment, we show comovement increases for stocks classified as "Stay-at-Home" by analysts and the media and "Meme"Â by retail investors on the Reddit social media platform. |
| Keywords | Sports events, media, Olympics, Olympic stocks, retail investors, valuation, fundamentals, comovement, categorization, investor sentiment, investor recognition, common factor, Stay-at-Home, Meme. |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3881333 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Social media analysts and sell-side analyst research
| Authors | Drake, Moon, Twedt, Warren |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We examine how research posted by "social media analysts" (SMAs)" -- individuals posting equity research online via social media investment platforms" -- is related to research subsequently produced by professional sell-side equity analysts. Using data from Seeking Alpha, we find that the market reaction to sell-side analyst research is substantially reduced when the analyst research is preceded by the report of an SMA, and that this is particularly true of sell-side analysts' earnings forecasts. We further find that this effect is more pronounced when SMA reports contain more decision-useful language, are produced by SMAs with greater expertise, and relate to firms with greater retail investor ownership. We also provide evidence that the attenuated response to sell-side research is most likely explained by SMA research preempting information in sell-side research and that analysts respond to SMA preemption with bolder and more disaggregated forecasts. Collectively, our results suggest that equity research posted online by SMAs provides investors with information that is similar to but arrives earlier than sell-side equity research, and speak to the connected and evolving roles of information intermediaries in capital markets. |
| Keywords | Social media analyst, sell-side analyst, information intermediaries, equity research |
| URL | https://ssrn.com/abstract=3918541 |
| Tags | Archival Empirical | Media and Textual Analysis |