Analysts’ Beauty and Performance
Ying Cao et al.
Management Science, forthcoming
We study whether sell-side financial analysts’ physical attractiveness is associated with their job performance. We find that attractive analysts make more accurate earnings forecasts than less attractive analysts. Moreover, more attractive analysts make stock recommendations that are more informative in the short run and more profitable in the long run. Additional analyses reveal that attractive analysts attain their better job performance at least partly through their privileged access to information from firm management. For the sources of the beauty effect, we find that more attractive analysts gain more media exposure, have better connections to institutional investors, and receive more internal support from their employers. Additional evidence suggests that analysts’ physical appearance per se at least partly explains our findings. Overall, our study shows that physical attractiveness has a profound impact on the job performance and information access of sell-side financial analysts.
The Equity Premium and the One Percent
Alexis Akira Toda & Kieran James Walsh
Review of Financial Studies, forthcoming
We show that in a general equilibrium model with heterogeneity in risk aversion or belief, shifting wealth from an agent who holds comparatively fewer stocks to one who holds more reduces the equity premium. From an empirical view, the rich hold more stocks, so inequality should predict excess stock market returns. Consistent with our theory, we find that when the U.S. top (e.g., 1%) income share rises, subsequent 1-year excess market returns significantly decline. This negative relation is robust to controlling for classic return predictors, predicting out-of-sample, and instrumenting inequality with estate tax rate changes. It also holds in international markets.
The Deregulation of the Private Equity Markets and the Decline in IPOs
Michael Ewens & Joan Farre-Mensa
NBER Working Paper, September 2019
The deregulation of securities laws — in particular the National Securities Markets Improvement Act (NSMIA) of 1996 — has increased the supply of private capital to late-stage private startups, which are now able to grow to a size that few private firms used to reach. NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older. This new equilibrium does not reflect an IPO market failure. Rather, founders are using their increased bargaining power vis-a-vis investors to stay private longer.
Does Regulatory Jurisdiction Affect the Quality of Investment-Adviser Regulation?
Ben Charoenwong, Alan Kwan & Tarik Umar
American Economic Review, October 2019, Pages 3681-3712
The Dodd-Frank Act shifted regulatory jurisdiction over "midsize" investment advisers from the SEC to state-securities regulators. Client complaints against midsize advisers increased relative to those continuing under SEC oversight by 30 to 40 percent of the unconditional probability. Complaints increasingly cited fiduciary violations and rose more where state regulators had fewer resources. Advisers responding more to weaker oversight had past complaints, were located farther from regulators, faced less competition, had more conflicts of interest, and served primarily less-sophisticated clients. Our results inform optimal regulatory design in markets with informational asymmetries and search frictions.
Alphabeticity Bias in 401(k) Investing
Thomas Doellman et al.
Financial Review, forthcoming
Structural factors that cause irrational investment in defined contribution savings plans are of great concern. Using a proprietary database of 401(k) plans we show that alphabeticity — the order that fund names appear when listed in alphabetical order — significantly biases participants’ investment allocation decisions. While we show a larger impact as the number of funds in the plan increases, this bias is strong even when relatively few funds are available in the plan menu. Importantly, our findings suggest that a more strategic ordering of funds could result in favorable outcomes for participants.
Shared analyst coverage: Unifying momentum spillover effects
Usman Ali & David Hirshleifer
Journal of Financial Economics, forthcoming
Identifying firm connections by shared analyst coverage, we find that a connected-firm (CF) momentum factor generates a monthly alpha of 1.68% (t = 9.67). In spanning regressions, the alphas of industry, geographic, customer, customer/supplier industry, single- to multi-segment, and technology momentum factors are insignificant/negative after controlling for CF momentum. Similar results hold in cross-sectional regressions and in developed international markets. Sell-side analysts incorporate news about linked firms sluggishly. These effects are stronger for complex and indirect linkages. Consistent with limited investor attention, these results indicate that momentum spillover effects are a unified phenomenon that is captured by shared analyst coverage.
Governance under the shadow of the law: Trading high value fine art
Anja Shortland & Andrew Shortland
Public Choice, forthcoming
The market for paintings by well-known artists is booming despite widespread concern about art crime and difficulties in establishing provenance. Public law enforcement is imperfect, and court cases often are deemed problematic. So how is the thriving art market governed in practice? We analyze the protocols used by the top auction houses to identify and resolve problems of illicit supply — fakes, forgeries and items with defective legal titles — through the lens of institutional analysis. We uncover a polycentric private governance system in which different actors govern distinct but overlapping issue areas, motivated by profit, prestige, or the search for truth. When the financial stakes rise, opportunistic behavior undermines the credibility of private governance. We argue that as litigious, super-rich investors entered the art market, the interaction between public law and the traditional private governance system restricted the supply of “blue chip” art, driving the escalation of prices.
Can Brands Circumvent Marketing Regulations? Exploiting Umbrella Branding in Financial Markets
Yan Lu et al.
Marketing Science, forthcoming
Governments often regulate marketing activities to ensure marketers do not misinform consumers and obtain “unfair” advantages. Yet, ample research finds such regulations may be ineffective since marketers are able to circumvent them. We examine if umbrella branding, a marketing strategy of multiple products sharing a common brand, can be used to circumvent marketing regulations on a given product. Specifically, in the asset management industry, we examine if hedge funds, faced with a comprehensive marketing ban, benefited from the advertising by their umbrella brand mutual fund affiliates and, if so, whether the hedge funds exploited this effect. We find that higher advertising by mutual fund affiliates leads to a significant increase in sales of umbrella brand hedge funds and that hedge funds’ circumstances in a trailing period impact the likelihood of advertising by their umbrella brand mutual fund affiliates. More importantly, using the 2012 JOBS Act that removed hedge funds’ marketing restrictions as a natural experiment, we find that hedge funds’ trailing circumstances had significantly less impact on umbrella branded mutual fund advertising after the passage of the JOBS Act. These findings are consistent with hedge funds using umbrella branding to circumvent the marketing ban.
Do dividends convey information about future earnings?
Charles Ham, Zachary Kaplan & Mark Leary
Journal of Financial Economics, forthcoming
Yes. We show that dividend changes contain information about highly persistent changes in future economic income. Three methodological differences lead us to different conclusions from the extant literature: (i) we use an “event window approach” to cleanly delineate earnings after dividend changes from those before, (ii) we use alternative earnings measures to control for endogenous investment and asset write-downs surrounding dividend changes, and (iii) we control for the nonlinear relation between dividend changes and market reactions. Our results suggest dividend announcement returns reflect information about the level of permanent earnings, though the timing of the information content is difficult to reconcile with traditional signaling models.