Do individual investors trade on investment-related Internet postings?
| Authors | Ammann, Schaub |
| Journal | Management Science |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Many people share investment ideas online. This study investigates whether individual investors trade on investment-related internet postings. We use unique data from a social trading platform that allow us to observe the shared portfolios of traders, their posted comments, and the replicating transactions of followers. We find robust evidence that followers increasingly replicate shared portfolios of traders after the posting of comments. However, postings do not help followers identify portfolios that deliver superior performance in the future. In a cross-sectional analysis, we show that it is mainly followers typically considered to be unsophisticated who trade after comment postings. |
| Keywords | Internet postings, individual investors, trading behavior, social trading, FinTech |
| URL | https://pubsonline.informs.org/doi/10.1287/mnsc.2020.3733 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
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 |
Speculative fever: Investor contagion in the housing bubble
| Authors | Bayer, Mangum, Roberts |
| Journal | American Economic Review |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Historical anecdotes abound of new investors being drawn into a booming asset market, only to suffer when the market turns. While the role of investor contagion in asset bubbles has been explored extensively in the theoretical literature, causal empirical evidence on the topic is much rarer. This paper studies the recent boom and bust in the US housing market and establishes that many novice investors entered the market as a direct result of observing investing activity of multiple forms in their own neighborhoods and that "infected" investors performed poorly relative to other investors along several dimensions. |
| URL | https://doi.org/10.1257/aer.20171611 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes |
Does firm investment respond to peers' investment?
| Authors | Bustamante, Fresard |
| Journal | Management Science |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks. |
| URL | https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2020.3695 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Does firm investment respond to peers' investment?
| Authors | Bustamante, Fresard |
| Journal | Management Science |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks. |
| Keywords | Investment, peer effect, competition, agglomeration economies |
| URL | https://doi.org/10.1287/mnsc.2020.3695 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases | Theory |
Negative peer disclosure
| Authors | Cao, Fang, Lei |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | This paper provides first evidence of negative peer disclosure (NPD), an emerging corporate strategy to publicize adverse news of industry peers on social media. Consistent with NPDs being implicit positive self-disclosures, disclosing firms experience a two-day abnormal return of 1.6%-1.7% over the market and industry. Further exploring the benefits and costs of such disclosures, we find that NPD propensity increases with the degree of product market rivalry and technology proximity and disclosing firms outperform nondisclosing peers in the product markets in the year following NPDs. These results rationalize peer disclosure and extend the scope of the literature beyond self-disclosure. |
| Keywords | Peer disclosure, spillover, product market rivalry, technology proximity, social media |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X21000404 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Media and Textual Analysis |
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) |
Listening in on investors' thoughts and conversations
| Authors | Chen, Hwang |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | A large literature in neuroscience and social psychology shows that humans are wired to be meticulous about how they are perceived by others. In this paper, we propose that impression management considerations can also end up guiding the content that investors transmit via word of mouth and inadvertently lead to the propagation of noise. We analyze server log data from one of the largest investment-related websites in the United States. Consistent with our proposition, we find that investors more frequently share articles that are more suitable for impression management despite such articles less accurately predicting returns. Additional analyses suggest that high levels of sharing can lead to overpricing. |
| Keywords | Social interactions, Social transmission bias, Asset prices |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X21003810 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |
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://papers.ssrn.com/sol3/papers.cfm?abstract_id=3908275&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Regressive mortgage credit redistribution in the post-crisis era
| Authors | D'Acunto, Rossi |
| Journal | Review of Financial Studies |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We document four secular trends about U.S. mortgage origination by traditional and FinTech lenders after the 2008-2009 financial crisis. First, since 2011, the overall number, size, and approval rate of small and medium-sized loans have been decreasing over time, relative to large loans. Second, the largest lenders redistribute their lending the most. Third, this loan-size redistribution of credit increases in the size of the lender. Fourth, the effects are stronger for mortgages further away from the conforming loan limit(s) in both directions. We argue that the supply of credit drives these secular trends, and we assess several potential economic mechanisms. |
| Keywords | Redistribution of mortgage credit, financial regulation reforms, supply-side forces, post-crisis era |
| URL | https://doi.org/10.1093/rfs/hhab008 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Extrapolative beliefs in the cross-section: What can we learn from the crowds?
| Authors | Da, Huang, Jin |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Using novel data from a crowdsourcing platform for ranking stocks, we investigate how investors form expectations about stock returns over the next week. We find that investors extrapolate from stocks' recent past returns, with more weight on more recent returns, especially when recent returns are negative, salient, or from a dispersed cross-section. Such extrapolative beliefs are stronger among nonprofessionals and large stocks. Moreover, consensus rankings negatively predict returns over the next week, more so among stocks with low institutional ownership and a high degree of extrapolation. A trading strategy that sorts stocks on investor beliefs generates an economically significant profit. |
| Keywords | Return extrapolation, beliefs in the cross-section, expectation formation |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X20302786 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Media and Textual Analysis |
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 |
Labor reactions to credit deterioration: Evidence from LinkedIn activity
| Authors | Gortmakers, Jeffers, Lee |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We examine worker reactions to firms' credit deterioration using anonymized networking activity on LinkedIn. In the weeks immediately following a negative credit event, connection activity increases at affected firms across the credit rating distribution, pointing to costs beyond those originating from bankruptcy. Heightened networking activity is associated with contemporaneous and future departures, especially at highly-rated firms. Other negative events like missed earnings and equity sell recommendations do not trigger similar reactions. Overall, our results indicate that the latent build-up of connections triggered by credit deterioration represents a source of fragility for firms. |
| Keywords | Network formation, credit ratings, credit deterioration, labor & finance |
| URL | https://ssrn.com/abstract=3456285 |
| Tags | Archival Empirical |