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 |
Crowdsourcing financial information to change spending behavior
| Authors | D'Acunto, Rossi, Weber |
| Year | 2019 |
| Type | Working Paper |
| Abstract | We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spending affects the reaction monotonically in both directions. Third, users' reaction is asymmetric - spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts. |
| Keywords | FinTech, learning, beliefs and expectations, peer pressure, financial decision-making, saving, consumer finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3348722 |
| Tags | Archival Empirical | Consumer Decisions | Financing- and Investment Decisions (Individual) | Social Network Structure |
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 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 |
How do investment ideas spread through social interaction? Evidence from a Ponzi scheme
| Authors | Rantala |
| Journal | Journal of Finance |
| Year | 2019 |
| Type | Published Paper |
| Abstract | A unique data set from a large Ponzi scheme allows me to study word-of-mouth diffusion of investment information. Investors could join the scheme only by invitation from an existing member, which allows me to observe how the idea spreads from one person to the next based on inviter-invitee relationships. I find that the observed social network has a scale-free connectivity structure, which significantly facilitates the diffusion of the investment idea and contributes to the growth and survival of the socially spreading Ponzi scheme. I further find that investors invest more if their inviter has comparatively higher age, education, and income. |
| URL | https://doi.org/10.1111/jofi.12822 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
From extreme to mainstream: How social norms unravel
| Authors | Bursztyn, Egorov, Fiorin |
| Year | 2018 |
| Type | Working Paper |
| Abstract | Social norms are typically thought to be persistent and long-lasting, sometimes surviving through growth, recessions, and regime changes. In some cases, however, they can quickly change. This paper examines the unraveling of social norms in communication when new information becomes available, e.g., aggregated through elections. We build a model of strategic communication between citizens who can hold one of two mutually exclusive opinions. In our model, agents communicate their opinions to each other, and senders care about receivers' approval. As a result, senders are more likely to express the more popular opinion, while receivers make less inference about senders who stated the popular view. We test these predictions using two experiments. In the main experiment, we identify the causal effect of Donald Trump's rise in political popularity on individuals' willingness to publicly express xenophobic views. Participants in the experiment are offered a bonus reward if they authorize researchers to make a donation to an anti-immigration organization on their behalf. Participants who expect their decision to be observed by the surveyor are significantly less likely to accept the offer than those expecting an anonymous choice. Increases in participants' perceptions of Trump's popularity (either through experimental variation or through the "natural experiment" of his victory) eliminate the wedge between private and public behavior. A second experiment uses dictator games to show that participants judge a person less negatively for publicly expressing (but not for privately holding) a political view they disagree with if that person's social environment is one where the majority of people holds that view. |
| Keywords | Social communication, belief updates, experiment |
| URL | https://www.nber.org/papers/w23415 |
| Tags | Experimental / Survey-Based Empirical | Social Network Structure | Theory |
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 |
Trust busting: The effect of fraud on investor behavior
| Authors | Gurun, Stoffman, Yonker |
| Journal | Review of Financial Studies |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We study the importance of trust in the investment advisory industry by exploiting the geographic dispersion of victims of the Madoff Ponzi scheme. Residents of communities that were exposed to the fraud subsequently withdrew assets from investment advisers and increased deposits at banks. Additionally, exposed advisers were more likely to close. Advisers who provided services that can build trust, such as financial planning advice, experienced fewer withdrawals. Our evidence suggests that the trust shock was transmitted through social networks. Taken together, our results show that trust plays a critical role in the financial intermediation industry. |
| Keywords | Social trust, investor behaviors, investment decisions, social networks, financial intermediaries |
| URL | https://doi.org/10.1093/rfs/hhx058 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
Social networks and housing markets
| Authors | Baily, Cao, Kuchler, Stroebel |
| Year | 2016 |
| Type | Working Paper |
| Abstract | We document that the recent house price experiences within an individual's social network affect her perceptions of the attractiveness of property investments, and through this channel have large effects on her housing market activity. Our data combine anonymized social network information from Facebook with housing transaction data and a survey. We first show that in the survey, individuals whose geographically-distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends. Based on these findings, we introduce a new methodology to document large effects of housing market expectations on individual housing investment decisions and aggregate housing market outcomes. Our approach exploits plausibly-exogenous variation in the recent house price experiences of individuals' geographically-distant friends as shifters of those individuals' local housing market expectations. Individuals whose friends experienced a 5 percentage points larger house price increase over the previous 24 months (i) are 3.1 percentage points more likely to transition from renting to owning over a two-year period, (ii) buy a 1.7 percent larger house, (iii) pay 3.3 percent more for a given house, and (iv) make a 7% larger downpayment. Similarly, when homeowners' friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. We also find that when individuals observe a higher dispersion of house price experiences across their friends, this has a negative effect on their housing investments. Finally, we show that these individual-level responses aggregate up to affect county-level house prices and trading volume. Our findings suggest that the house price experiences of geographically-distant friends might provide a valid instrument for local house price growth. |
| Keywords | House price, social contagion, investor behaviors, market expectation |
| URL | https://www.nber.org/papers/w22258 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Social Network Structure |
Sharing with friends versus strangers: How interpersonal closeness influences word-of-mouth valence
| Authors | Dubois, Bonezzi, Angelis |
| Journal | Journal of Marketing Research |
| Year | 2016 |
| Type | Published Paper |
| Abstract | How does interpersonal closeness (IC)--the perceived psychological proximity between a sender and a recipient--influence word-of-mouth (WOM) valence? The current research proposes that high levels of IC tend to increase the negativity of WOM shared, whereas low levels of IC tend to increase the positivity of WOM shared. The authors hypothesize that this effect is due to low versus high levels of IC triggering distinct psychological motives. Low IC activates the motive to self-enhance, and communicating positive information is typically more instrumental to this motive than communicating negative information. In contrast, high IC activates the motive to protect others, and communicating negative information is typically more instrumental to this motive than communicating positive information. Four experiments provide evidence for the basic effect and the underlying role of consumers' motives to self-enhance and protect others through mediation and moderation. The authors discuss implications for understanding how WOM spreads across strongly versus weakly tied social networks. |
| Keywords | Word of mouth, word-of-mouth valence, interpersonal closeness, self-enhancement, social media |
| URL | https://doi.org/10.1509/jmr.13.0312 |
| Tags | Consumer Decisions | Experimental / Survey-Based Empirical | Media and Textual Analysis | Social Network Structure |
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 |
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 |
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 |
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 |
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 price of a CEO's rolodex
| Authors | Engelberg, Gao, Parsons |
| Journal | Review of Financial Studies |
| Year | 2013 |
| Type | Published Paper |
| Abstract | CEOs with large networks earn more than those with small networks. An additional connection to an executive or director outside the firm increases compensation by about $17,000 on average, more so for "important" members, such as CEOs of big firms. Pay-for-connectivity is unrelated to several measures of corporate governance, evidence in favor of an efficient contracting explanation for CEO pay. |
| Keywords | CEO compensation, social networks, information value, corporate governance |
| URL | https://doi.org/10.1093/rfs/hhs114 |
| Tags | Archival Empirical | Manager / Firm Behavior | Social Network Structure | Theory |
Friends with money
| Authors | Engelberg, Gao, Parsons |
| Journal | Journal of Financial Economics |
| Year | 2012 |
| Type | Published Paper |
| Abstract | When banks and firms are connected through interpersonal linkages - such as their respective management having attended college or previously worked together - interest rates are markedly reduced, comparable with single shifts in credit ratings. These rate concessions do not appear to reflect sweetheart deals. Subsequent firm performance, such as future credit ratings or stock returns, improves following a connected deal, suggesting that social networks lead to either better information flow or better monitoring. |
| Keywords | Asymmetric information, bank lending, cost of debt, social connections, lending outcomes |
| URL | https://doi.org/10.1016/j.jfineco.2011.08.003 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Network Structure |
Opinion leadership and social contagion in new product diffusion
| Authors | Iyengar, Bulte, Valente |
| Journal | Marketing Science |
| Year | 2011 |
| Type | Published Paper |
| Abstract | We study how opinion leadership and social contagion within social networks affect the adoption of a new product. In contrast to earlier studies, we find evidence of contagion operating over network ties, even after controlling for marketing effort and arbitrary systemwide changes. More importantly, we also find that the amount of contagion is moderated by both the recipients' perception of their opinion leadership and the sources' volume of product usage. The other key finding is that sociometric and self-reported measures of leadership are weakly correlated and associated with different kinds of adoption-related behaviors, which suggests that they probably capture different constructs. We discuss the implications of these novel findings for diffusion theory and research and for marketing practice. |
| Keywords | Superstition, insurance, rural household |
| URL | https://doi.org/10.1287/mksc.1100.0566 |
| Tags | Archival Empirical | Consumer Decisions | Social Network Structure |