Buy versus Sell
The ESG Backlash and the Demand for ESG Mutual Funds
Quinn Curtis
Journal of Empirical Legal Studies, forthcoming
Abstract:
The backlash to ESG investing is in full swing, with dozens of states enacting measures aimed at curtailing the consideration of environmental, social, and governance factors in their pension funds. Meanwhile, ESG mutual funds are experiencing net outflows after a period of lagging performance. Is this the end for ESG funds? This paper draws on the literature on mutual fund flows to study how the demand for ESG funds has changed over time and how that demand interacts with the political and legal backlash to ESG. It finds that ESG funds received significant positive flows, controlling for conventional predictors of fund flow, starting in 2017. This effect peaked in late 2019, much earlier than the publicly perceived decline of ESG. Abnormal investor preference for ESG funds disappeared in 2020, around the time of the Trump Department of Labor rule targeting ESG and then reappeared in 2021 before declining again. The excess demand for ESG was driven largely by institutional share classes, particularly pre-2021. While the positive effect of ESG branding on flows has disappeared, demand for ESG funds (controlling for past performance) has generally remained non-negative up to 2024. Most of the decline in excess demand for ESG funds predates the political backlash and state anti-ESG laws. Tests for a causal relationship between ESG fund flows and the political backlash, as measured by mentions of ESG in conservative media and state laws restricting ESG, show no statistical connection.
Childhood Exposure to Misbehavior and the Culture of Financial Misconduct
Christopher Clifford, Jesse Ellis & William Gerken
Review of Financial Studies, forthcoming
Abstract:
This paper examines the impact of childhood cultural upbringing on financial advisor misconduct using novel data on advisors’ childhood addresses. We find that an advisor’s childhood location significantly predicts misconduct, with exposure to misbehavior culture during childhood playing a stronger role than exposure during adulthood. Addressing endogeneity concerns, we conduct several tests that support the notion that our results reflect cultural exposure rather than advisors’ employment choices, location preferences, local conditions, family characteristics, or clientele characteristics. Our findings underscore the formative influence of culture in shaping financial advisors’ personal ethics and could help us understand and prevent financial misconduct.
The Fallacy of Concentration
Mark Kritzman & David Turkington
MIT Working Paper, October 2025
Abstract:
Many investors believe that the U.S. stock market is riskier than it has been historically because a large fraction of its capitalization is concentrated in a few large technology companies. Some investors, therefore, conclude that they should rebalance their portfolios toward safer assets. The authors present clear evidence that the U.S. stock market has indeed become more concentrated. However, they also discuss practical and theoretical arguments and present persuasive empirical evidence that gives pause to the notion that investors should act to offset concentration.
Do Markets Believe in Transformative AI?
Isaiah Andrews & Maryam Farboodi
NBER Working Paper, September 2025
Abstract:
Economic theory predicts that transformative technologies may influence interest rates by changing growth expectations, increasing uncertainty about growth, or raising concerns about existential risk. Examining US bond yields around major AI model releases in 2023-4, we find economically large and statistically significant movements concentrated at longer maturities. The median and mean yield responses across releases in our sample are negative: long-term Treasury, TIPS, and corporate yields fall and remain lower for weeks. Viewed through the lens of a simple, representative agent consumption-based asset pricing model, these declines correspond to downward revisions in expected consumption growth and/or a reduction in the perceived probability of extreme outcomes such as existential risk or arrival of a post-scarcity economy. By contrast, changes in consumption growth uncertainty do not appear to drive our results.
Mindfulness, the dual-hormone hypothesis, and performance in financial traders
Smrithi Prasad et al.
Psychoneuroendocrinology, December 2025
Abstract:
Steroid hormones such as testosterone are theorized to predict financial trading success. However, studies have reported inconsistent associations between hormones and financial trading performance and have largely overlooked interactions between multiple hormone systems and psychological factors that may influence hormones during trading. One such psychological state, mindfulness, is posited to influence hormone levels and improve trading performance. However, the hormonal pathway between mindfulness and financial trading performance remains untested. To address this gap, we examined the extent to which a brief mindfulness intervention influenced changes in testosterone and cortisol levels, and how these hormonal changes jointly predicted performance in a financial trading task in financial traders. Relative to a control group, traders who underwent the mindfulness intervention exhibited a reduction in cortisol levels and an elevation in testosterone levels. This dual-hormone profile -- decreased cortisol and increased testosterone -- was linked to better trading performance: elevated testosterone levels predicted higher earnings among traders whose cortisol levels decreased but not among traders whose cortisol levels increased. These findings offer initial insights into mindfulness-induced hormonal changes among traders, with downstream benefits for financial performance. We propose recommendations for further research on the endocrine pathways underlying mindfulness' influence on financial performance.
News media coverage and the predictability of house prices
Oguzhan Cepni
Real Estate Economics, forthcoming
Abstract:
This article introduces new housing-media-attention indices for the 50 U.S. states based on the Bloomberg Terminal News Trends (NT) function, which collects articles from various news and social media sources and identifies their content using artificial intelligence tools. The results indicate that the state-level housing-media-attention index explains a significant portion of the total variation in future house prices, even when economic fundamentals are considered. Additionally, I find that the impact of housing media attention on future house prices is stronger in states with non-recourse mortgage laws, greater land-use regulations, and higher social connectedness among individuals of both low and high socioeconomic status. Out-of-sample forecasting results further suggest that housing media attention has the potential to act as an early indicator of the direction of the housing market.
Forced to be Active: Evidence from a Regulation Intervention
Petter Bjerksund et al.
Management Science, forthcoming
Abstract:
Mutual funds known as closet indexers are marketed as active but actually operate as low-activity funds. Investors end up paying for full service but receiving only a part of it. Supervisory authorities around the world are considering ways to regulate these funds. In this context, we examine the impact of regulatory interventions by Scandinavian regulators. We compare the scrutinized Scandinavian funds with similar unaffected European funds. The findings suggest that the regulated Scandinavian funds preferred increased activity over fee reduction. Consequently, fund managers adopted more active management strategies, resulting in a significant 2% decrease in annual alpha. Therefore, the regulatory interventions resulted in unfavorable outcomes for investors.
Vestigial Tails? Floor Brokers at the Close in Modern Electronic Markets
Edwin Hu & Dermot Murphy
Management Science, forthcoming
Abstract:
The closing auction is an increasingly important trade mechanism due to the rise of passive funds that require closing price execution. We study differences in auction mechanism design on NYSE and Nasdaq that may affect closing price efficiency. Unlike Nasdaq, NYSE allows late auction orders through its floor brokers, providing traders with more flexibility to mitigate or create large last-minute auction imbalances. Price changes in the closing auction are more likely to reverse on NYSE compared with Nasdaq, suggesting greater price inefficiency in NYSE closing auctions. Larger last-minute abnormal imbalances on NYSE, particularly in stocks where auction competition may be inhibited by relatively high floor broker auction fees, explain these stronger reversals. Evidence from the NYSE floor closure during the COVID-19 pandemic supports a causal interpretation. Our results highlight an important tradeoff between auction flexibility and price efficiency.
Strategic Behavior by Equity Lenders
Brian Henderson, Gergana Jostova & Alexander Philipov
Management Science, forthcoming
Abstract:
We document that stock lenders are informed about market conditions and pursue revenue maximization by setting premiums or offering discounts on stock loan fees. Using a model of supply and demand in the equity lending market, we illustrate the effect of stock borrowers’ private information on the elasticity of shorting demand. Strategic lenders respond to demand elasticity and increase their revenues through premiums or discounts on lending fees. Empirically, decomposing stock loan fees into intrinsic fee and premium or discount, we confirm lenders’ strategic behavior, showing that premiums and discounts among difficult-to-borrow stocks lead to increased lending revenues. This strategic lending behavior has new implications about informed shorting, short interest, and transaction costs in the equity lending market.