The impact of restricting labor mobility on corporate investment and entrepreneurship
| Authors | Jeffers |
| Year | 2021 |
| Type | Working Paper |
| Abstract | This paper examines how labor frictions affect investment rate and new firm entry. Using matched employee-employer data from LinkedIn, I first show that increases in the enforceability of non-compete agreements lead to widespread declines in employee departures across seniority levels, driven by workers in knowledge-intensive occupations. Investment rates at existing firms increase, especially for firms that employ more skilled workers. This comes at the expense of new firm entry, which declines substantially in knowledge-intensive sectors. The results suggest that labor frictions play an important role in investment decisions, and that NCs may factor into slowing business dynamism. |
| Keywords | Labor mobility, entrepreneurship, investment, non-competes, human capital |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis |
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) |
Partisan return gap: The polarized stock market in the time of a pandemic
| Authors | Sheng, Sun, Wang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using two proxies for investors' political affiliation, we document sharp differences in stock returns between firms likely dominated by Democratic investors (blue stocks) and those dominated by Republican investors (red stocks) during the COVID pandemic. Red stocks have 20 basis points higher risk-adjusted returns than blue stocks on COVID news days (Partisan Return Gap). Lockdown policies, COVID cases, industry and firm fundamentals only explain at most 25% of the return gap. Polarized political beliefs about COVID, revealed through people's social distancing behaviors and their Stock-Twits, contribute to about 40% of the return gap beyond the fundamental channel. Our paper provides partisanship as a novel aspect in understanding abnormal stock returns during the pandemic. |
| Keywords | Partisanship, stock returns, pandemic, COVID-19, political polarization, political finance, social finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3809575 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Social Network Structure |
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 |
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 |
Biased information transmission in investor social networks: Evidence from professional traders
| Authors | Lim, Lane, Uzzi |
| Journal | Academy of Management Annual Meeting Proceedings |
| Year | 2020 |
| Type | Published Paper |
| Abstract | This research examines how the positive or negative valence of proprietary information affects both the likelihood that people diffuse this information through their social networks and the likelihood that recipients' access to this information provides them with a source of comparative advantage. Using a unique dataset of over 2 million stock trades and associated profits and losses, and 1 million instant messages exchanged between professional day traders at a U.S. hedge fund, we show that day traders are more likely to talk about their gains than their losses with their close contacts, suggesting that positive information is more likely to be shared among one's close network of strong ties. However, by examining the subsequent behaviors of message recipients, we find that recipients tend to discount the value of positive, gains related information, being both more likely to pass on and profit from negative information related to trading losses, particularly from their strong ties. Our results suggest that although individuals are more likely to share positive information with their contacts, message recipients appear to account for the asymmetry in their subsequent communications and decision-making. |
| URL | https://journals.aom.org/doi/10.5465/AMBPP.2020.18198abstract |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Social Transmission Biases |
Investing in low-trust countries: On the role of social trust in the global mutual fund industry
| Authors | Massa, Wang, Zhang, Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2020 |
| Type | Published Paper |
| Abstract | We hypothesize that social trust, in mitigating contracting incompleteness, may have an important effect on the activeness and effectiveness of delegated portfolio management. Using a complete sample of worldwide open-end mutual funds, we find that trust is positively associated with the activeness of funds and that trust-related active share delivers superior performance (e.g., approximately 2% per year for cross-border investments). Moreover, "trust in the market" and "trust in managers" play important yet different roles for different types of cross-border delegated portfolio management. Our results suggest that trust acts as a fundamental building block for delegated portfolio management. |
| Keywords | Social trust, portfolio management, mutual fund, contracting relationship |
| URL | https://doi.org/10.1017/S0022109020000848 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Investment Decisions (Institutional) |
Behavioral and social corporate finance
| Authors | Cronqvist, Pely |
| Book | Oxford Research Encyclopedia of Economics and Finance |
| Year | 2019 |
| Type | Book | Literature Review Paper |
| Abstract | Corporate finance is about understanding the determinants and consequences of the investment and financing policies of corporations. In a standard neoclassical profit maximization framework, rational agents, that is, managers, make corporate finance decisions on behalf of rational principals, that is, shareholders. Over the past two decades, there has been a rapidly growing interest in augmenting standard finance frameworks with novel insights from cognitive psychology, and more recently, social psychology and sociology. This emerging subfield in finance research has been dubbed behavioral corporate finance, which differentiates between rational and behavioral agents and principals. The presence of behavioral shareholders, that is, principals, may lead to market timing and catering behavior by rational managers. Such managers will opportunistically time the market and exploit mispricing by investing capital, issuing securities, or borrowing debt when costs of capital are low and shunning equity, divesting assets, repurchasing securities, and paying back debt when costs of capital are high. Rational managers will also incite mispricing, for example, cater to non-standard preferences of shareholders through earnings management or by transitioning their firms into an in-fashion category to boost the stock's price. The interaction of behavioral managers, that is, agents, with rational shareholders can also lead to distortions in corporate decision making. For example, managers may perceive fundamental values differently and systematically diverge from optimal decisions. Several personal traits, for example, overconfidence or narcissism, and environmental factors, for example, fatal natural disasters, shape behavioral managers' preferences and beliefs, short or long term. These factors may bias the value perception by managers and thus lead to inferior decision making. An extension of behavioral corporate finance is social corporate finance, where agents and principals do not make decisions in a vacuum but rather are embedded in a dynamic social environment. Since managers and shareholders take a social position within and across markets, social psychology and sociology can be useful to understand how social traits, states, and activities shape corporate decision making if an individual's psychology is not directly observable. |
| Keywords | behavioral finance, social finance, corporate finance, market efficiency, cognitive biases, limits of arbitrage, limits of governance |
| URL | https://doi.org/10.1093/acrefore/9780190625979.013.427 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
The relevance of broker networks for information diffusion in the stock market
| Authors | Di Maggio, Franzoni, Kermani, Sommavilla |
| Journal | Journal of Financial Economics |
| Year | 2019 |
| Type | Published Paper |
| Abstract | This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D. |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X1930087X |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
Corporate culture as an implicit contract
| Authors | Jeffers, Lee |
| Year | 2019 |
| Type | Working Paper |
| Abstract | We develop a measure of corporate culture using coworker connectivity on LinkedIn's platform, and show it is strongly correlated with positive employee relations and satisfaction. Using state-level changes to employment agreements as shocks to explicit contracts, we find that these changes significantly impact employees in weakly connected firms, but have little to no effect on those at strongly connected firms. Our results suggest that firms with strong corporate culture are less dependent on explicit contracts to retain human capital. We document implications for firms' investment decisions and other outcomes. |
| Keywords | Corporate culture, human capital, implicit contracts, non-competes |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3426060 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis | Social Network Structure |
The self-presentational consequences of upholding one's stance in spite of the evidence
| Authors | John, Jeong, Gino, Huang |
| Journal | Organizational Behavior and Human Decision Processes |
| Year | 2019 |
| Type | Published Paper |
| Abstract | Five studies explore the self-presentational consequences of refusing to "back down" -- that is, upholding a stance despite evidence of its inaccuracy. Using data from an entrepreneurial pitch competition, Study 1 shows that entrepreneurs tend not to back down even though investors are more impressed by entrepreneurs who do. Next, in two sets of experiments, we unpack the psychology underlying why actors refuse to publicly back down and investigate observers' impressions of those actors. Specifically, we show that observers view people who refuse to back down as confident but unintelligent, and these perceptions drive consequential decisions about such refusers, such as whether to invest in their ideas (Studies 1 & 2) or whether to hire them (Study 3). Although actors can intuit these effects (Study 4), this understanding is not reflected in their behavior because they are concerned with saving face (Study 5). |
| Keywords | Self-presentation, belief perseverance, judgment, confidence, persuasion |
| URL | https://doi.org/10.1016/j.obhdp.2019.07.001 |
| Tags | Experimental / Survey-Based Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases |
The relevance of broker networks for information diffusion in the stock market
| Authors | Maggio, Franzoni, Kermani, Sommavilla |
| Journal | Journal of Financial Economics |
| Year | 2019 |
| Type | Published Paper |
| Abstract | This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D. |
| Keywords | Brokers, institutional investors, social networks, informed trading, market efficiency |
| URL | https://doi.org/10.1016/j.jfineco.2019.04.002 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
Narrative economics: how stories go viral and drive major economic events
| Authors | Shiller |
| Book | Narrative Economics |
| Year | 2019 |
| Type | Book |
| Abstract | Stories people tell-about financial confidence or panic, housing booms, or Bitcoin-can go viral and powerfully affect economies, but such narratives have traditionally been ignored in economics and finance because they seem anecdotal and unscientific. In this groundbreaking book, Robert Shiller explains why we ignore these stories at our peril-and how we can begin to take them seriously. Using a rich array of examples and data, Shiller argues that studying popular stories that influence individual and collective economic behavior-what he calls "narrative economics"-may vastly improve our ability to predict, prepare for, and lessen the damage of financial crises and other major economic events. The result is nothing less than a new way to think about the economy, economic change, and economics. In a new preface, Shiller reflects on some of the challenges facing narrative economics, discusses the connection between disease epidemics and economic epidemics, and suggests why epidemiology may hold lessons for fighting economic contagions. |
| Keywords | COVID-19, coronavirus, H1N1, Wuhan, Spanish flu, Spanish influenza, influenza, Ebola polio disease, 1918 flu epidemic, Great Recession, 1929 financial epidemic, pandemic, co-epidemic, contagion, market meltdown, stock crash, bubble, panic, epidemiology, world financial crisis, virality, disease, stimulus, fear, bank runs, bank failures, behavioral economics, consumer confidence, crowd psychology, crisis of confidence, crisis, mutation, conspiracy theories, fake news, false narratives, chaos theory, butterfly effect, John Maynard Keynes |
| URL | https://doi.org/10.1515/9780691212074 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |
What motivates buy-side analysts to share recommendations online?
| Authors | Crawford, Gray, Johnson, Price |
| Journal | Management Science |
| Year | 2018 |
| Type | Published Paper |
| Abstract | We examine why buy-side analysts share investment ideas on SumZero.com, a private social networking website designed to facilitate interaction and information sharing among buy-side professionals. We first document that our sample of more than 1,000 buy-side analysts issue recommendations that have investment value. In particular, recommendations generate significant returns when they are posted to the website and the returns to both buy and sell recommendations drift in the direction of the recommendation. These returns are the most dramatic for contrarian recommendations (i.e., those issued contrary to the sell-side consensus). We explore labor-market motivations for sharing information and document that analysts who have strong incentives to seek new jobs (those at small funds), are significantly more likely to issue recommendations. We also show that analysts who share investment ideas are more likely to change jobs, and that the ratings their recommendations receive are positively related to changing employment. Overall, we show that social networking is an effective reputation building and job seeking tool for buy-side analysts. |
| Keywords | Security analysts, stock recommendations, hedge funds |
| URL | https://doi.org/10.1287/mnsc.2017.2749 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Social Network Structure |
Social and cultural issues in finance
| Authors | Cronqvist |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2018 |
| Type | Published Paper | Literature Review Paper |
| Keywords | Social networks, social capital, social preferences, financial decision, asset pricing, corporate governance |
| URL | https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/virtual-special-issues/jfqa-virtual-issue-2 |
| 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 | Social Transmission Biases | Theory |
Information networks: Evidence from illegal insider trading tips
| Authors | Ahern |
| Journal | Journal of Financial Economics |
| Year | 2017 |
| Type | Published Paper |
| Abstract | This paper exploits a novel hand-collected data set to provide a comprehensive analysis of the social relationships that underlie illegal insider trading networks. I find that inside information flows through strong social ties based on family, friends, and geographic proximity. On average, inside tips originate from corporate executives and reach buy-side investors after three links in the network. Inside traders earn prodigious returns of 35% over 21 days, with more central traders earning greater returns, as information conveyed through social networks improves price efficiency. More broadly, this paper provides some of the only direct evidence of person-to-person communication among investors. |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X17300570 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Propagation of Noise / Undesirable Outcomes |
Corporate environmental policy and shareholder value: Following the smart money
| Authors | Fernando, Sharfman and Uysal |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm's exposure to environmental risk and those that enhance its perceived environmental friendliness ("greenness"). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations, as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors. |
| Keywords | Corporate environmental policy, CSR, shareholder value, institutional investors, firm value |
| URL | https://doi.org/10.1017/S0022109017000680 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
Social capital and debt contracting: Evidence from bank loans and public bonds
| Authors | Hasan, Hoi, Wu and Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting. |
| Keywords | Social capital, bank loan cost, firm's financing decisions, debt contracting, investors' decisions |
| URL | https://doi.org/10.1017/S0022109017000205 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior |
Social capital and debt contracting: evidence from bank loans and public bonds
| Authors | Hasan, Hoi, Wu, Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting. |
| URL | https://doi.org/10.1017/S0022109017000205 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior |