The geography of financial misconduct
| Authors | Parsons, Sulaeman, Titman |
| Journal | Journal of Finance |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of 3. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city-level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city. |
| Keywords | Corporate corruption, financial misconduct, peer effects, political fraud, white collar misconduct |
| URL | https://doi.org/10.1111/jofi.12704 |
| Tags | Archival Empirical | Manager / Firm Behavior | Theory |
Causal inference in word-of-mouth research: methods and results
| Authors | Seiler, Yao, Zervas |
| Book | Customer Analytics for Maximum Impact: Academic Insights and Business Use Cases |
| Year | 2018 |
| Type | Book | Literature Review Paper |
| Abstract | One of the biggest changes in the marketing landscape in recent years has been a shift toward fostering word-of-mouth (WOM) to let consumers advocate on a brand's behalf. Many marketing executives consider online WOM, which has increased dramatically in volume in recent years, one of the most effective forms of marketing. Every second, 6,000 tweets are posted on Twitter, and that volume is growing at around 30% per year. Similar patterns apply to other social media platforms such as Facebook, as well as to platforms that host costumer reviews. TripAdvisor and Yelp host 570 million and 142 million reviews, respectively, and are visited by 455 million and 188 million users each month. However, reliably measuring the impact of WOM on demand is subject to some unique challenges, and many marketing managers admit that measuring WOM effectiveness remains difficult. In this chapter, we outline the current state of the academic literature regarding the impact of online WOM on demand. We first outline measurement challenges in the realm of WOM and how they can be resolved. We then summarize recent findings on the effectiveness of WOM in two domains: customer reviews and online conversations about brands on platforms such as Twitter or other social media. The former are a type of activity that typically occur after consumption and that impose a specific structure (often a rating scale) on consumers' WOM. The latter instead are less structured and can take place before and/or after consumption. These two areas are sufficiently different and shall be treated separately. |
| URL | http://people.bu.edu/zg/publications/wom-causal-inference.pdf |
| Tags | Archival Empirical | Consumer Decisions | Media and Textual Analysis |
The spread of true and false news online
| Authors | Vosoughi, Roy, Aral |
| Journal | Science |
| Year | 2018 |
| Type | Published Paper |
| Abstract | We investigated the differential diffusion of all of the verified true and false news stories distributed on Twitter from 2006 to 2017. The data comprise ~126,000 stories tweeted by ~3 million people more than 4.5 million times. We classified news as true or false using information from six independent fact-checking organizations that exhibited 95 to 98% agreement on the classifications. Falsehood diffused significantly farther, faster, deeper, and more broadly than the truth in all categories of information, and the effects were more pronounced for false political news than for false news about terrorism, natural disasters, science, urban legends, or financial information. We found that false news was more novel than true news, which suggests that people were more likely to share novel information. Whereas false stories inspired fear, disgust, and surprise in replies, true stories inspired anticipation, sadness, joy, and trust. Contrary to conventional wisdom, robots accelerated the spread of true and false news at the same rate, implying that false news spreads more than the truth because humans, not robots, are more likely to spread it. |
| URL | https://doi.org/10.1007/978-981-16-3398-0_15 |
| Tags | Archival Empirical | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |
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 |
Credit scores, social capital, and stock market participation
| Authors | Bricker, Li |
| Year | 2017 |
| Type | Working Paper |
| Abstract | While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities. |
| Keywords | Credit scores, social capital, stock market participation, trust |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911760 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
CEO tournaments: A cross-country analysis of causes, cultural influences, and consequences
| Authors | Burns, Minnick, Starks |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | Using a cross-country sample, we examine the chief executive officer (CEO) tournament structure (measured alternatively as the ratio and the difference of pay between the CEO and other top executives within a firm). We find the tournament structure to vary systematically with firm and country cultural characteristics. In particular, firm size and the cultural values of power distance, fair income differences, and competition are significantly associated with variations in tournament structures. We also establish support for the primary implication of tournament theory in that tournament structure tends to be positively related to firm value, even after controlling for endogeneity. |
| Keywords | CEO tournament structure, cultural values, firm decisions, firm values |
| URL | https://doi.org/10.1017/S0022109017000163 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Innovating to invest: The role of basic education
| Authors | D'Acunto |
| Year | 2017 |
| Type | Working Paper |
| Abstract | Despite the focus of entrepreneurial finance research on high-tech innovation, more than 75% of innovations are new processes and products in traditional manufacturing. I show that basic education is a key determinant of innovation in traditional industries. I document that manufacturers in European regions with 10% more high school graduates file 15% more patents, and invest 4% more in capital expenditures. To absorb spatially correlated unobservables, I construct Virtual Regions that only exploit the variation in basic education across nearby locations. To address the possibility of reverse causality, I establish that regional basic education persists for decades, and I use the quasi-exogenous diffusion of the printing press after 1450 to instrument for historical basic education. The results offer a human capital channel for innovation that feeds into the innovation-to-investment literature in finance. |
| Keywords | Enterprise innovation, human capital investment, historical shocks, literacy distribution |
| URL | https://www.eief.it/files/2015/01/02-jmp-eief_dacunto.pdf |
| Tags | Archival Empirical | Evolutionary Finance | Experimental / Survey-Based Empirical | Manager / Firm Behavior | Productivity Spillovers |
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 |
Tweeting as a marketing tool: A field experiment in the TV industry
| Authors | Gong, Zhang, Zhao, Jiang |
| Journal | Journal of Marketing Research |
| Year | 2017 |
| Type | Published Paper |
| Abstract | Many businesses today have adopted tweeting as a new form of product marketing. However, whether and how tweeting affects product demand remains inconclusive. The authors explore this question using a randomized field experiment on Sina Weibo, the top tweeting website in China. The authors collaborate with a major global media company and examine how the viewing of its TV shows is affected by (1) the media company's tweets about its shows, and (2) recruited Weibo influentials' retweets of the company tweets. The authors find that both company tweets and influential retweets increase show viewing, but in different ways. Company tweets directly boost viewing, whereas influential retweets increase viewing if the show tweet is informative. Meanwhile, influential retweets are more effective than company tweets in bringing new Weibo followers to the company, which indirectly increases viewing. The authors discuss recommendations on how to manage tweeting as a marketing tool. |
| Keywords | Tweet, social media marketing, social media return on investment, field experiment, television |
| URL | https://doi.org/10.1509/jmr.14.0348 |
| Tags | Archival Empirical | Consumer Decisions | Manager / Firm Behavior | Media and Textual Analysis |
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 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 |
Social screens and systematic investor boycott risk
| Authors | Luo, Balvers |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We model the pricing implications of screens adopted by socially responsible investors. The model reproduces the empirically observed abnormal return to sin stock and implies a premium for systematic investor boycott risk that affects targeted as well as nontargeted firms. The investor boycott premium is not displaced by litigation risk, measures of neglect effect, illiquidity, industry momentum, or concentration. The investor boycott risk factor is useful in explaining mean returns across industries, and its premium varies with the relative wealth of socially responsible investors and the business cycle. |
| Keywords | Socially responsible investing, sin stocks, boycott risk premium, stock returns |
| URL | https://doi.org/10.1017/S0022109016000910 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Theory |
How language shapes word of mouth's impact
| Authors | Packard, Berger |
| Journal | Journal of Marketing Research |
| Year | 2017 |
| Type | Published Paper |
| Abstract | Word of mouth affects consumer behavior, but how does the language used in word of mouth shape that impact? Might certain types of consumers be more likely to use certain types of language, affecting whose words have more influence? Five studies, including textual analysis of more than 1,000 online reviews, demonstrate that compared to more implicit endorsements (e.g., "I liked it," "I enjoyed it"), explicit endorsements (e.g., "I recommend it") are more persuasive and increase purchase intent. This occurs because explicit endorsers are perceived to like the product more and have more expertise. Looking at the endorsement language consumers actually use, however, shows that while consumer knowledge does affect endorsement style, its effect actually works in the opposite direction. Because novices are less aware that others have heterogeneous product preferences, they are more likely to use explicit endorsements. Consequently, the endorsement styles novices and experts tend to use may lead to greater persuasion by novices. These findings highlight the important role that language, and endorsement styles in particular, plays in shaping the effects of word of mouth. |
| Keywords | Word of mouth, language, persuasion, consumer knowledge, social perception |
| URL | https://doi.org/10.1509/jmr.15.0248 |
| Tags | Archival Empirical | Consumer Decisions | Media and Textual Analysis | Social Transmission Biases |
Corporate risk culture
| Authors | Pan, Siegel, Wang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We examine the formation and evolution of corporate risk culture, that is, the preferences toward risk and uncertainty shared by a firm's leaders, as well as its effect on corporate policies. We document persistent commonality in risk attitudes inside firms, which arises through the selection of leaders with similar preferences and is rooted in the founders' risk attitudes. Changes in corporate risk culture over time affect corporate investment policies, whereas cross-sectional differences in founders' risk attitudes, that is, firms' initial risk culture, contribute to differences across firms in persistent firm policies, such as research and development intensity. |
| Keywords | Risk preferences, risk attitudes, firm's leader, corporate policies, corporate culture |
| URL | https://doi.org/10.1017/S0022109017000771 |
| Tags | Archival Empirical | Evolutionary Finance | Manager / Firm Behavior |
Does online word-of-mouth increase demand? (and how?) Evidence from a natural experiment
| Authors | Seiler, Yao, Wang |
| Journal | Marketing Science |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We leverage a temporary block of the Chinese microblogging platform Sina Weibo due to political events to estimate the causal effect of online word-of-mouth content on product demand in the context of TV show viewership. Based on this source of exogenous variation, we estimate an elasticity of TV show ratings (market share in terms of viewership) with respect to the number of relevant comments (comments were disabled during the block) of 0.016. We find that more postshow microblogging activity increases demand, whereas comments posted prior to the show airing do not affect viewership. These patterns are inconsistent with informative or persuasive effects and suggest complementarity between TV consumption and anticipated postshow microblogging activity. |
| Keywords | Microblogging, advertising, social media, word of mouth |
| URL | https://pubsonline.informs.org/doi/abs/10.1287/mksc.2017.1045?casa_token=lxxq5FpqeeYAAAAA:wXJbLLGEETzSUvKZeU-YY5LI26G3TkYo9IMD1j6sOlCDOgwPNrrscJ-3k5Nj5Cm9pe5mi7ArVvpq |
| Tags | Archival Empirical | Consumer Decisions | Media and Textual Analysis |
Pockets of poverty: The long-term effects of redlining
| Authors | Appel, Nickerson |
| Year | 2016 |
| Type | Working Paper |
| Abstract | This paper studies the long-term effects of redlining policies that restricted access to credit in urban communities. For empirical identification, we use a regression discontinuity design that exploits boundaries from maps created by the Home Owners Loan Corporation (HOLC) in 1940. We find that "redlined" neighborhoods have 4.8% lower home prices in 1990 relative to adjacent areas. This finding is robust to the exclusion of boundaries that coincide with the physical features of cities (e.g., rivers, landmarks). Moreover, we show that housing characteristics varied smoothly at the boundaries when the maps were created. Evidence suggests lower property values may be driven by negative externalities associated with fewer owner-occupied homes and more vacant structures. Overall, our results indicate the effects of discriminatory credit rationing can persist decades after such practices are formally discontinued. |
| Keywords | Redlining, credit rationing, household finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2852856 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) |
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 |
Estimating peer effects in networks with peer encouragement designs
| Authors | Eckles, Kizilcec, Bakshy |
| Journal | Proceedings of the National Academy of Sciences of the United States of America |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Peer effects, in which the behavior of an individual is affected by the behavior of their peers, are central to social science. Because peer effects are often confounded with homophily and common external causes, recent work has used randomized experiments to estimate effects of specific peer behaviors. These experiments have often relied on the experimenter being able to randomly modulate mechanisms by which peer behavior is transmitted to a focal individual. We describe experimental designs that instead randomly assign individuals' peers to encouragements to behaviors that directly affect those individuals. We illustrate this method with a large peer encouragement design on Facebook for estimating the effects of receiving feedback from peers on posts shared by focal individuals. We find evidence for substantial effects of receiving marginal feedback on multiple behaviors, including giving feedback to others and continued posting. These findings provide experimental evidence for the role of behaviors directed at specific individuals in the adoption and continued use of communication technologies. In comparison, observational estimates differ substantially, both underestimating and overestimating effects, suggesting that researchers and policy makers should be cautious in relying on them. |
| Keywords | Social interactions, social networks, causal inference, experimental design |
| URL | https://doi.org/10.1073/pnas.1511201113 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Media and Textual Analysis |
Corporate finance policies and social networks
| Authors | Fracassi |
| Journal | Management Science |
| Year | 2016 |
| Type | Published Paper |
| Abstract | This paper shows that managers are influenced by their social peers when making corporate policy decisions. Using biographical information about executives and directors of U.S. public companies, we define social ties from current and past employment, education, and other activities. We find that more connections two companies share with each other, more similar their capital investments are. To address endogeneity concerns, we find that companies invest less similarly when an individual connecting them dies. The results extend to other corporate finance policies. Furthermore, central companies in the social network invest in a less idiosyncratic way and exhibit better economic performance. |
| Keywords | Corporate finance, policy decisions, social networks, capital investments |
| URL | https://doi.org/10.1287/mnsc.2016.2433 |
| Tags | Archival Empirical | Manager / Firm Behavior |