Peer pressure: Social interaction and the disposition effect
| Authors | Heimer |
| Journal | Review of Financial Studies |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage. |
| URL | https://doi.org/10.1093/rfs/hhw063 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Peer pressure: Social interaction and the disposition effect
| Authors | Heimer |
| Journal | The Review of Financial Studies |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage. |
| URL | https://econpapers.repec.org/article/ouprfinst/v_3a29_3ay_3a2016_3ai_3a11_3ap_3a3177-3209..htm |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
The value of crowdsourced earnings forecasts
| Authors | Jame, Johnston, Markov, Wolfe |
| Journal | Journal of Accounting Research |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Crowdsourcing-when a task normally performed by employees is out-sourced to a large network of people via an open call-is making inroads into the investment research industry. We shed light on this new phenomenon by examining the value of crowdsourced earnings forecasts. Our sample includes 51,012 forecasts provided by Estimize, an open platform that solicits and reports forecasts from over 3,000 contributors. We find that Estimize forecasts are incrementally useful in forecasting earnings and measuring the market's expectations of earnings. Our results are stronger when the number of Estimize contributors is larger, consistent with the benefits of crowdsourcing increasing with the size of the crowd. Finally, Estimize consensus revisions generate significant two-day size-adjusted returns. The combined evidence suggests that crowdsourced forecasts are a useful supplementary source of information in capital markets. |
| Keywords | Analyst, forecast, earnings response coefficients, crowdsourcing |
| URL | https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-679X.12121 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Banks and development: Jewish communities in the Italian Renaissance and current economic performance
| Authors | Pascali |
| Journal | Review of Economics and Statistics |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Are differences in local banking development long lasting? Do they affect economic performance? I answer these questions by relying on a historical development that occurred in Italian cities during the Renaissance. A change in Catholic doctrine led to the development of modern banks in cities hosting Jewish communities. Using Jewish demography in 1500 as an instrument, I provide evidence of extraordinary persistence in the level of banking development across Italian cities and substantial effects of local banks on per capita income. Additional firm-level analyses suggest that banks exert large effects on aggregate productivity by reallocating resources toward more efficient firms. |
| Keywords | Banking development, religion, Jewish, economic productivity, long-lasting differences |
| URL | https://doi.org/10.1162/REST_a_00481 |
| Tags | Archival Empirical | Investment Decisions (Institutional) |
Social networks and parental behavior in the intergenerational transmission of religion
| Authors | Patacchini, Zenou |
| Journal | Quantitative Economics |
| Year | 2016 |
| Type | Published Paper |
| Abstract | We analyze the intergenerational transmission of the strength of religion focusing on the interplay between family and social influences. We find that parental investment in transmitting religious values and peers' religiousity are complements. The relative importance of these socialization factors depends on the religiosity of the parents. |
| Keywords | Religion, cultural transmission, social networks |
| URL | https://onlinelibrary.wiley.com/doi/abs/10.3982/QE506 |
| Tags | Archival Empirical | Social Network Structure | Theory |
Religion and stock price crash risk
| Authors | Callen, Fang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | This study examines whether religiosity at the county level is associated with future stock price crash risk. We find robust evidence that firms headquartered in counties with higher levels of religiosity exhibit lower levels of future stock price crash risk. This finding is consistent with the view that religion,as a set of social norms, helps to curb bad-news-hoarding activities by managers. Our evidence further shows that the negative relation between religiosity and future crash risk is stronger for riskier firms and for firms with weaker governance mechanisms measured by shareholder takeover rights and dedicated institutional ownership. |
| Keywords | Religion, social norms, stock crash, corporate governance |
| URL | https://doi.org/10.1017/S0022109015000046 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior |
Do better-connected CEOs innovate more?
| Authors | Faleye, Kovacs and Venkateswaran |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We present evidence suggesting that chief executive officer (CEO) connections facilitate investments in corporate innovation. We find that firms with better-connected CEOs invest more in research and development and receive more and higher quality patents. Further tests suggest that this effect stems from two characteristics of personal networks that alleviate CEO risk aversion in investment decisions. First, personal connections increase the CEO's access to relevant network information, which encourages innovation by helping to identify, evaluate, and exploit innovative ideas. Second, personal connections provide the CEO with labor market insurance that facilitates investments in risky innovation by mitigating the career concerns inherent in such investments. |
| Keywords | CEO, corporate innovation, risk attitudes, social networks, investment decisions |
| URL | https://doi.org/10.1017/S0022109014000714 |
| Tags | Archival Empirical | Manager / Firm Behavior | Social Network Structure |
Facebook finance: How social interaction propagates active investing
| Authors | Heimer, Simon |
| Year | 2015 |
| Type | Working Paper |
| Abstract | This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. A trader's good short-term performance causes them to contact others. A trader's activity increases when peers perform well and increase communication. We use the staggered entry of brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network, to argue these effects are causal. This pattern of communication supports active trading, even though the network reveals the low success rate of retail traders. |
| URL | https://EconPapers.repec.org/RePEc:fip:fedcwp:1522 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Social Transmission Biases |
Corporate policies of republican managers
| Authors | Hutton, Jiang and Kumar |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We demonstrate that personal political preferences of corporate managers influence corporate policies. Specifically, Republican managers who are likely to have conservative personal ideologies adopt and maintain more conservative corporate policies. Those firms have lower levels of corporate debt, lower capital and research and development (R&D) expenditures, less risky investments, but higher profitability. Using the 9/11 terrorist attacks and Sept. 2008 Lehman Brothers bankruptcy as natural experiments, we demonstrate that investment policies of Republican managers became more conservative following these exogenous uncertainty-increasing events. Furthermore, around chief executive officer (CEO) turnovers, including CEO deaths, firm leverage policy becomes more conservative when managerial conservatism increases. |
| Keywords | Political ideology, manager's behaviors, corporate policy |
| URL | https://doi.org/10.1017/S0022109014000702 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Manager / Firm Behavior |
Social interaction at work
| Authors | Hvide, Ostberg |
| Journal | Journal of Financial Economics |
| Year | 2015 |
| Type | Published Paper |
| Abstract | Stock market investment decisions of individuals are positively correlated with those of coworkers. Sorting of unobservably similar individuals to the same workplaces is unlikely to explain this pattern, as evidenced by the investment behavior of individuals who move between plants. Purchases made under stronger coworker purchase activity are not associated with higher returns. Moreover, social interaction appears to drive the purchase of within-industry stocks. Overall, we find a strong influence of coworkers on investment choices, but not an influence that improves the quality of investment decisions. |
| Keywords | Individual investors, peer effects, social interaction, investment decisions, stock selection |
| URL | https://doi.org/10.1016/j.jfineco.2015.06.004 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes |
Success in global venture capital investing: Do institutional and cultural differences matter?
| Authors | Nahata, Hazarika, Tandon |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We analyze the impact of institutional and cultural differences on success in global venture capital (VC) investing. In both developed and emerging economies, superior legal rights (and enforcement) and better developed stock markets significantly enhance VC performance. Remarkably, cultural distance between countries of the portfolio company and its lead investor positively affects VC success. Further analysis reveals that cultural differences create incentives for rigorous ex ante screening, improving VC performance. Finally, local VC participation enhances success and mitigates foreign VCs' "liability of foreignness," albeit only in developed economies. Our findings follow from analyzing VC investments in nearly 10,000 companies across 30 countries. |
| Keywords | VC investing, cultural differences, institutional differences, stock market development, international evidence |
| URL | https://doi.org/10.1017/S0022109014000568 |
| Tags | Archival Empirical | Investment Decisions (Institutional) |
The people in your neighborhood: Social interactions and mutual fund portfolios
| Authors | Pool, Stoffman, Yonker |
| Journal | Journal of Finance |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We find that socially connected fund managers have more similar holdings and trades. The overlap of funds whose managers reside in the same neighborhood is considerably higher than that of funds whose managers live in the same city but in different neighborhoods. These effects are larger when managers share a similar ethnic background, and are not explained by preferences. Valuable information is transmitted through these peer networks: a long-short strategy composed of stocks purchased minus sold by neighboring managers delivers positive risk-adjusted returns. Unlike prior empirical work, our tests disentangle the effects of social interactions from community effects. |
| URL | https://doi.org/10.1111/jofi.12208 |
| Tags | Archival Empirical | Investment Decisions (Institutional) |
Word of mouth and interpersonal communication: A review and directions for future research
| Authors | Berger |
| Journal | Journal of Consumer Psychology |
| Year | 2014 |
| Type | Published Paper | Literature Review Paper |
| Abstract | People often share opinions and information with their social ties, and word of mouth has an important impact on consumer behavior. But what drives interpersonal communication and why do people talk about certain things rather than others? This article argues that word of mouth is goal driven and serves five key functions (i.e., impression management, emotion regulation, information acquisition, social bonding, and persuasion). Importantly, I suggest these motivations are predominantly self- (rather than other) serving and drive what people talk about even without their awareness. Further, these drivers make predictions about the types of news and information people are most likely to discuss. This article reviews the five proposed functions and well as how contextual factors (i.e., audience and communication channel) may moderate which functions play a larger role. Taken together, the paper provides insight into the psychological factors that shape word of mouth and outlines additional questions that deserve further study. |
| URL | https://doi.org/10.1016/j.jcps.2014.05.002 |
| Tags | Archival Empirical | Consumer Decisions | Experimental / Survey-Based Empirical | Media and Textual Analysis | Social Transmission Biases |
Learning from peers: Knowledge transfer and sales force productivity growth
| Authors | Chan, Li, Pierce |
| Journal | Marketing Science |
| Year | 2014 |
| Type | Published Paper |
| Abstract | We study how peers impact worker productivity growth among salespeople in the cosmetics department of a department store. We first exploit a shift assignment policy that creates exogenous variation in salespersons' peers each week to identify and quantify sources of worker learning. We find that peer-based learning is more important than learning-by-doing for individuals, and there is no evidence of forgetting. Working with high-ability peers substantially increases the long-term productivity growth of new salespeople. We then examine possible mechanisms behind peer-based learning by exploiting the multiple colocated firms in our setting that sell products with different task difficulties and compensate their sales forces using either team-based or individual-based compensation systems. The variation in incentives to compete and cooperate within and across firm boundaries, combined with variation in sales difficulty for different product classes, allows us to suggest two mechanisms behind peer-based learning: observing successful sales techniques of peers and direct teaching. Our paper advocates the importance of learning from one another in the workplace and suggests that individual peer-based learning is a foundation of both organizational learning curves and knowledge spillovers across firms. |
| URL | https://www.jstor.org/stable/24544760 |
| Tags | Archival Empirical | Productivity Spillovers |
Wisdom of crowds: The value of stock opinions transmitted through social media
| Authors | Chen, De, Hu, Hwang |
| Journal | The Review of Financial Studies |
| Year | 2014 |
| Type | Published Paper |
| Abstract | Social media has become a popular venue for individuals to share the results of their own analysis on financial securities. This paper investigates the extent to which investor opinions transmitted through social media predict future stock returns and earnings surprises. We conduct textual analysis of articles published on one of the most popular social media platforms for investors in the United States. We also consider the readers' perspective as inferred via commentaries written in response to these articles. We find that the views expressed in both articles and commentaries predict future stock returns and earnings surprises. |
| URL | https://academic.oup.com/rfs/article-abstract/27/5/1367/1581938 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Media and Textual Analysis |
Family welfare cultures
| Authors | Dahl, Kostol, Mogstad |
| Journal | Quarterly Journal of Economics |
| Year | 2014 |
| Type | Published Paper |
| Abstract | We investigate the existence and importance of family welfare cultures, where the receipt of a welfare program by one generation causes increased participation in the next generation. Our context is Norway's disability insurance (DI) system. To overcome the challenge of correlated unobservables across generations, we take advantage of random assignment of judges to DI applicants whose cases are initially denied. Some appeal judges are systematically more lenient, which leads to random variation in the probability a parent will be allowed DI. Using this exogenous variation, we find strong evidence for a causal link across generations: when a parent is allowed DI at the appeal stage, their adult child's participation over the next five years increases by 6 percentage points. This effect grows over time, rising to 12 percentage points after 10 years. Although these findings are specific to our setting, they highlight that welfare reforms can have long-lasting effects on program participation, since any original effect on the current generation could be reinforced by changing the participation behavior of their children as well. The detailed nature of our data allows us to compare the intergenerational transmission with spillover effects in other networks and to explore mechanisms. |
| URL | https://doi.org/10.1093/qje/qju019 |
| Tags | Archival Empirical |
Deviations from norms and informed trading
| Authors | Kumar, Page |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2014 |
| Type | Published Paper |
| Abstract | Investment managers are subject to personal and institutional norms that can constrain their investment choices. We conjecture that norm-constrained investors deviate from such norms only when they have compelling information, and we predict that deviating investments earn relatively high abnormal returns ex post. Consistent with our conjecture, we find that institutions averse to holding lottery-like stocks or sin stocks earn relatively high abnormal returns when they choose to hold such stocks. We find similar but weaker results for deviations from broader style categories. Overall, our evidence indicates that deviations from established institutional or social norms signal informed investing. |
| Keywords | Investment manager behavior, social norms, informed investing, portfolio performance |
| URL | https://doi.org/10.1017/S0022109014000519 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
Information sharing and stock market participation: Evidence from extended families
| Authors | Li |
| Journal | Review of Economics and Statistics |
| Year | 2014 |
| Type | Published Paper |
| Abstract | Using the Panel Study of Income Dynamics, we document that controlling for observable characteristics, household investors' likelihood of entering the stock market within the ensuing five years is about 20% to 30% higher if their parents or children had entered the stock market during the previous five years. By eliminating competing hypotheses such as preference similarity and herding, we argue that these findings highlight the significance of information sharing regarding household financial decisions. |
| URL | https://doi.org/10.1162/REST_a_00301 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
The diffusion of microfinance
| Authors | Banerjee, Chandrasekhar, Duflo, Jackson |
| Journal | Science |
| Year | 2013 |
| Type | Published Paper |
| Abstract | To study the impact of the choice of injection points in the diffusion of a new product in a society, we developed a model of word-of-mouth diffusion and then applied it to data on social networks and participation in a newly available microfinance loan program in 43 Indian villages. Our model allows us to distinguish information passing among neighbors from direct influence of neighbors' participation decisions, as well as information passing by participants versus nonparticipants. The model estimates suggest that participants are seven times as likely to pass information compared to informed nonparticipants, but information passed by nonparticipants still accounts for roughly one-third of eventual participation. An informed household is not more likely to participate if its informed friends participate. We then propose two new measures of how effective a given household would be as an injection point. We show that the centrality of the injection points according to these measures constitutes a strong and significant predictor of eventual village-level participation. |
| URL | http://dx.doi.org/10.1126/science.1236498 |
| Tags | Archival Empirical | Social Network Structure |
The diffusion of microfinance
| Authors | Banerjee, Chandrasekhar, Duflo, Jackson |
| Year | 2013 |
| Type | Working Paper |
| Abstract | We examine how participation in a microfinance program diffuses through social networks. We collected detailed demographic and social network data in 43 villages in South India before microfinance was introduced in those villages and then tracked eventual participation. We exploit exogenous variation in the importance (in a network sense) of the people who were first informed about the program, "the injection points". Microfinance participation is higher when the injection points have higher eigenvector centrality. We estimate structural models of diffusion that allow us to (i) determine the relative roles of basic information transmission versus other forms of peer influence, and (ii) distinguish information passing by participants and non-participants. We find that participants are significantly more likely to pass information on to friends and acquaintances than informed non-participants, but that information passing by non-participants is still substantial and significant, accounting for roughly a third of informedness and participation. We also find that, conditioned on being informed, an individual's decision is not significantly affected by the participation of her acquaintances. |
| Keywords | Social network centralities, information transmission, microfinance program |
| URL | https://www.nber.org/papers/w17743 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |