Futures
Ties That Bind: The Value of Professional Connections to Sell-Side Analysts
Daniel Bradley, Sinan Gokkaya & Xi Liu
Management Science, forthcoming
Abstract:
We examine professional connections among executives and analysts formed through overlapping historical employment. Analysts with professional connections to coverage firms have more accurate earnings forecasts and issue more informative buy and sell recommendations. These analysts are more likely to participate, be chosen first, and ask more questions during earnings conference calls and analyst/investor days. Homophily based on gender, age, and ethnicity is orthogonal to professional connections. Brokers attract greater trade commissions on stocks covered by connected analysts. Firms benefit through securing research coverage and invitations to broker-hosted investor conferences emulating from these connections.
The Murder-Suicide of the Rentier: Population Aging and the Risk Premium
Joseph Kopecky & Alan Taylor
NBER Working Paper, April 2020
Abstract:
Population aging has been linked to global declines in interest rates. A similar trend shows that equity risk premia are on the rise. An existing literature can explain part of the decline in the trend in safe rates using demographics, but has no mechanism to speak to trends in relative asset prices. We calibrate a heterogeneous agent life-cycle model with equity markets, showing that this demographic channel can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing premium attached to risky assets. This is because the life cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting forward to 2050 we show that persistent demographic forces will continue to push the risk free rate further into negative territory, while the equity risk premium remains elevated.
Analysts' Cultural Attitudes to Time Orientation
Shuping Chen et al.
University of Texas Working Paper, March 2020
Abstract:
We study how analysts' cultural attitudes to time orientation affect their production of long-term earnings forecasts, the profitability of their stock recommendations, and managerial myopia for the firms they cover. We find that analysts from a long-term oriented culture produce more long-term earnings forecasts, issue more timely long-term forecasts and more profitable stock recommendations. These results are more pronounced among firms with more long-term investments, for smaller firms, and during periods of higher economic uncertainty. Exploring the quasi-natural experiments of brokerage houses' mergers and closures, we find a positive and plausibly causal effect of the coverage by long-term oriented analysts on firm innovation. Contrary to extant research finding that analysts' coverage in general fosters managerial myopia, our paper shows that the coverage of long-term oriented analysts ameliorates managerial myopia.
Disclosure Obfuscation in Mutual Funds
Ed deHaan et al.
University of Washington Working Paper, February 2020
Abstract:
Mutual funds hold 31% of the U.S. equity market and comprise 61% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests that investors' difficulty in choosing between funds is partially due to mutual fund managers creating unnecessarily complex disclosures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this "disclosure obfuscation" theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We address this concern by examining disclosure obfuscation among S&P 500 index funds, which have largely the same risks and gross returns but charge widely different fees. Using bespoke measures designed specifically for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees with unnecessarily complex disclosures. Our study improves our understanding of the role of disclosure in the mutual fund market, and of why price dispersion persists among homogenous index funds. We also discuss insights for mutual fund regulation and the academic literature on corporate disclosures.
Call Me by Your Name: The Effect of Analyst-CEO First Name Commonality on Analyst Forecast Accuracy
Omri Even-Tov, Kanyuan (Kevin) Huang & Brett Trueman
University of California Working Paper, April 2020
Abstract:
In this paper we document that the earnings forecasts of security analysts who share a first name with the CEO of a covered firm (referred to as 'matched' analysts) are more accurate, on average, than those of analysts who do not share a first name (referred to as 'unmatched' analysts). This result is consistent with findings in psychology which show that individuals have an affinity for those who share first names and suggests that the CEO is more likely to share private information with a matched analyst. We find this phenomenon to be concentrated among those matched analysts with less common first names, perhaps because the salience of sharing a first name is lower for analysts with more common names. It is also stronger in situations where there is greater information asymmetry between management and analysts.
Where Has All the Data Gone?
Maryam Farboodi et al.
NBER Working Paper, April 2020
Abstract:
As financial technology improves and data becomes more abundant, do market prices reflect this data growth? While recent studies documented rises in the information content of prices, we show that, across asset types, there is data divergence. Large, growth stock prices increasingly reflect information about future firm earnings. This is the rise reflected in the previous studies. But over the same time period, the information content of small and value firm prices was flat or declining. Our structural estimation allows us to disentangle these informational trends from changing asset characteristics. These facts pose a new puzzle: Amidst the explosion of data processing, why has this data informed only the prices of a subset of firms, instead of benefiting the market as a whole? Our structural model offers a potential answer: Large growth firms' data grew in value, as big firms got bigger and growth magnified the effect of these changes in size.
What Drives Risk Perception? A Global Survey with Financial Professionals and Laypeople
Felix Holzmeister et al.
Management Science, forthcoming
Abstract:
Risk is an integral part of many economic decisions and is vitally important in finance. Despite extensive research on decision making under risk, little is known about how risks are actually perceived by financial professionals, the key players in global financial markets. In a large-scale survey experiment with 2,213 finance professionals and 4,559 laypeople in nine countries representing ~50% of the world's population and more than 60% of the world's gross domestic product, we expose participants to return distributions with equal expected return, and we systematically vary the distributions' next three higher moments. Of these, skewness is the only moment that systematically affects financial professionals' perception of financial risk. Strikingly, variance does not influence risk perception, even though return volatility is the most common risk measure in finance in both academia and the industry. When testing other, compound risk measures, the probability to experience losses is the strongest predictor of what is perceived as being risky. Analyzing professionals' propensity to invest, skewness and loss probability also have strong predictive power, while volatility and kurtosis have some additional effect. Our results are very similar for laypeople, and they are robust across and within countries with different cultural backgrounds, as well as for different job fields of professionals.
Elusive Safety: The New Geography of Capital Flows and Risk
Laura Alfaro et al.
NBER Working Paper, April 2020
Abstract:
Using a unique confidential data set with industry disaggregation of official U.S. claims and liabilities, we find that dollar-denominated securities are increasingly intermediated by tax havens financial centers (THFC) and by less regulated funds. These securities are risky and respond to tax rates and prudential regulations, suggesting tax avoidance and regulatory arbitrage. Issuers are mostly intangible-intensive multinationals, that can more easily move across borders. Investors require a high Sharpe ratio, suggesting search for yield. In contrast, safe treasuries are mainly held by the foreign official sector and increased with quantitative easing policies. Facts on the privately held securities are rationalized through a model where multinationals with heterogeneous default probabilities endogenously choose to shift profits to a THFC against a cost and are funded by global intermediaries with endogenous monitoring intensity. A fall in debt costs, due to an increase in global savings channeled by low regulated intermediaries, raises firms' profits. More firms can afford to enter the THFC and, as they appear elusively safer, intermediaries reduce monitoring intensity, increasing ex post risk.
Big Data, Retail Investors, and Financial Markets
Taha Havakhor et al.
Temple University Working Paper, March 2020
Abstract:
Retail investors, on average, are known to be less informed. The democratized access to big financial data enabled by recent technological advances has the potential to make them better informed. At the same time, behavioral finance and economic theories postulate that such unprecedented access to big data may inspire more retail trades which are incongruent with market fundamentals. Against this backdrop, we investigate the impact of convenient access to big data on retail investors and the financial market. Our identification strategy exploits the sudden shutdown of Yahoo! Finance Application Programming Interface (API), which feeds financial data primarily to retail investors. We find that within one month after the API shutdown, retail trading volumes in retail target firms dropped by 9% (no effect on institutional trades), market liquidity deteriorated, and retail trades as a whole became more predictive of future returns, suggesting that retail trades supported by big data access are, on average, noisier. The findings imply big data alone can be harmful to retail investors without sufficient financial literacy.
Interfirm Ties Between Ventures and Limited Partners of Venture Capital Funds: Performance Effects in Financial Markets
Umit Ozmel et al.
Organization Science, forthcoming
Abstract:
We argue that strong indirect ties are conducive to the transfer of private information, which provides an advantage in identifying profitable investment opportunities. In our context, a strong indirect tie is generated between an investor and a focal firm if the investor was a limited partner of the focal firm's lead venture capital fund. We suggest that an investor can access private information on the focal firm's underlying value through its strong indirect tie to the focal firm via the focal firm's lead venture capitalist. Supporting our theory, we show that after the focal firm's initial public offering, the investor with a strong indirect tie to the focal firm receives high risk-adjusted return when the investor chooses to invest in the focal firm's stock in the stock exchange market. We also show that the investor's private information attained through its strong indirect tie to the focal firm is more valuable (i) when there is higher exogenous market uncertainty and (ii) when the investor faces higher information asymmetry.
Evolutionary disruption of S&P 500 trading concentration: An intriguing tale of a financial innovation
Gowri Shankar, James Miller & Sundar Balakrishnan
PLoS ONE, March 2020
Abstract:
The novel finding of Balakrishnan, Miller & Shankar (2008) that investors, overwhelmed by the plethora of stock investment offerings, limit their analysis and daily choices to only a small subset of stocks (i.e., herding behavior) now seems to be common wisdom (Iosebashvili, 2019). We investigate whether the introduction of an innovation in financial products designed to allow investors to trade the entire product bundle of S&P 500 stocks, namely S&P 500 index funds, altered "herding behavior" by creating a new class of index investors. We model the distribution of daily trading concentration as a power law function and examine changes over the last six decades. Intriguingly, we discover a unique pattern in the trading concentration distribution that exhibits two distinct trends. For the period 1960-75, the trading concentration of the S&P 500 stocks tracks the increasing trend for the entire market, i.e., the unevenness in trading has steadily increased. However, after the introduction of S&P 500 index funds in 1975, concentration of trading in the S&P 500 stocks has steadily decreased, i.e., trading distribution has become more even across all 500 stocks, contrary to the current belief of equity analysts. This is also in sharp contrast to the case of U.S. stocks that are not in the S&P 500 index where trading concentration has steadily increased. We further corroborate the uniqueness of the inverted V-shape by a counterfactual investigation of the trading concentration patterns for other sets of 500 stock portfolios. This uniquely distinctive trading concentration pattern for S&P 500 stocks appears to be driven by the increasing dominance of bundle trading by index investors.
A Tangled Tale of Training and Talent: PhDs in Institutional Asset Management
Ranadeb Chaudhuri et al.
Management Science, forthcoming
Abstract:
Performance of investment products managed by firms in which PhDs play a key role is superior to the performance of products managed by otherwise similar firms. This relation is not a result of endogenous matching between firms and PhDs. Performance is related to training (the field of study) because economics or finance PhDs outperform other PhDs. Performance is also related to talent because PhDs who published in top outlets outperform other PhDs. Field-specific training is not relevant among the most talented PhDs because the performance gap between economics or finance PhDs and other PhDs disappears among published PhDs.