Buying or Selling
Political polarization in financial news
Eitan Goldman, Nandini Gupta & Ryan Israelsen
Journal of Financial Economics, May 2024
Abstract:
Comparing coverage of the same corporate financial news by the conservative Wall Street Journal and the liberal New York Times, we find strong evidence of political polarization in their reporting on both the intensive and extensive margins of coverage. We show that this politics-induced disagreement in corporate financial news leads to an increase in abnormal trading volume for the most politically extreme firms. Our results highlight a new source of investor disagreement, arising out of polarized reporting of corporate financial news, that generates trade among investors.
Financial Innovation in the Twenty-First Century: Evidence from US Patents
Josh Lerner et al.
Journal of Political Economy, forthcoming
Abstract:
We explore the evolution of financial innovation using US finance patents. Patented financial innovations are substantial and increasingly economically important. Their subject matter has changed, consistent with the industry's shift toward household investors and borrowers. Information technology (IT) and other nonfinancial firms drove the surge in financial patenting. The location of innovation shifted, with banks moving activity away from states with tight financial regulation and high-tech regions attracting innovation by payments, IT, and nonfinancial firms. Analyses of returns suggest that the social value of these innovations is higher than their private value. We present a simple model to explain these trends.
Brain activity of professional investors signals future stock performance
Leonard van Brussel et al.
Proceedings of the National Academy of Sciences, 16 April 2024
Abstract:
A major aspiration of investors is to better forecast stock performance. Interestingly, emerging "neuroforecasting" research suggests that brain activity associated with anticipatory reward relates to market behavior and population-wide preferences, including stock price dynamics. In this study, we extend these findings to professional investors processing comprehensive real-world information on stock investment options while making predictions of long-term stock performance. Using functional MRI, we sampled investors' neural responses to investment cases and assessed whether these responses relate to future performance on the stock market. We found that our sample of investors could not successfully predict future market performance of the investment cases, confirming that stated preferences do not predict the market. Stock metrics of the investment cases were not predictive of future stock performance either. However, as investors processed case information, nucleus accumbens (NAcc) activity was higher for investment cases that ended up overperforming in the market. These findings remained robust, even when controlling for stock metrics and investors' predictions made in the scanner. Cross-validated prediction analysis indicated that NAcc activity could significantly predict future stock performance out-of-sample above chance. Our findings resonate with recent neuroforecasting studies and suggest that brain activity of professional investors may help in forecasting future stock performance.
Stock market and the psychological health of investors
Chang Liu & Maoyong Fan
Financial Review, forthcoming
Abstract:
Utilizing a national individual-level medical dataset and the home bias phenomenon in investment, our study shows a strong and robust link between declines in local stock returns and increased antidepressant consumption among investors. This effect intensifies in areas with higher per capita dividend income, suggesting a direct relationship between higher stock ownership and stronger responses. We confirm that portfolio losses, not local economic conditions, are responsible for increased antidepressant usage during market downturns. Using the frequency of psychotherapy sessions yields similar findings. Moreover, our study supports the loss aversion hypothesis as we find positive stock returns do not influence antidepressant usage.
Investor Logins and the Disposition Effect
Edika Quispe-Torreblanca et al.
Management Science, forthcoming
Abstract:
Using data from an online brokerage, we examine the role of investor logins in trading behavior. We find that a new reference point is created when an investor logs in and views the investor's portfolio. We observe this as a disposition effect on returns since last login in addition to the traditional disposition effect on returns since purchase. Further, these reference points produce a strong interaction such that even a small loss since last login nullifies the positive effect of a gain since purchase. This interaction follows if investors select the higher, more aspirational price as a reference point.
On the Capital Market Consequences of Big Data: Evidence from Outer Space
Zsolt Katona et al.
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We use the introduction of satellite coverage of major retailers to study the capital market implications of unequal access to big data. Satellite data enabled sophisticated investors with access to such data to formulate profitable trading strategies, especially by targeting the upcoming reports of retailers with bad news for the quarter. The introduction of satellite data led to more informed short-selling activity, less informed individual buying activity, and lower stock liquidity around the reports of retailers with satellite coverage. We conclude that unequal access to big data can increase information asymmetry among market participants without immediately enhancing price discovery.
Robo advisors and access to wealth management
Michael Reher & Stanislav Sokolinski
Journal of Financial Economics, May 2024
Abstract:
We investigate how access to robo-advisors impacts the financial investment and welfare of less-wealthy investors. We leverage a quasi-experiment where a major U.S. robo-advisor significantly expands access by reducing its account minimum, increasing participation by middle-class investors but not the poor. A benchmark model calibrated to portfolio-level data rationalizes this increase: middle-class investors want sophisticated investing but cannot achieve it themselves. Their welfare rises moderately, driven by advanced features like multi-dimensional glide-paths and additional priced risk factors. Middle-age investors gain three times more than millennials. Our results reveal novel margins of demand for robo-advisors, helping explain their sustained growth.
Institutional pressure and analyst behavior: Evidence from the financial sector
Chang Liu, Maoyong Fan & Manoj Athavale
Financial Review, forthcoming
Abstract:
This study examines the impact of employment background on the objectivity of profitability forecasts in the financial sector. We find that investment bank analysts provide relatively biased recommendations and less accurate forecasts than their counterparts at independent research firms (IRFs). The performance discrepancy is greater for bulge bracket banks and for firms involved in syndication with the analysts' employers. A closer look at analysts transitioning between IRFs and investment banks reveals that these biases stem from their affiliation with investment banks rather than personal bias. Our findings emphasize the critical influence of the work environment on analyst behavior.