Making Trades
Trading stocks builds financial confidence and compresses the gender gap
Saumitra Jha & Moses Shayo
Economic Journal, forthcoming
Abstract:
Many studies document low rates of financial literacy and suboptimal levels of participation in financial markets. These issues are particularly acute among women. Does this reflect a self-reinforcing trap? If so, can a nudge to participate in financial markets generate knowledge, confidence, and further increase informed participation? We conduct a large field experiment that enables and incentivizes working-age men and women -- a challenging group to reach with standard financial training programs -- to trade stocks for four to seven weeks. We provide no additional educational content. We find that trading significantly improves financial confidence, as reflected in stock market participation, objective and subjective measures of financial knowledge, and risk tolerance. These effects are especially strong among women. Participants also become more self-reliant and consult others less when making financial decisions.
The Economic Consequences of Hedge Fund Regulation: An Analysis of the Effect of the Dodd-Frank Act
Fernán Restrepo
Journal of Legal Studies, June 2024, Pages 391-434
Abstract:
This paper exploits registration data administered by the Securities and Exchange Commission to examine the effect of the Dodd-Frank Act on profitability, risk-taking, and capital formation in the hedge fund industry. The data show that after the act was implemented, there was a significant decline in investors’ profitability that can be at least partially attributed to direct compliance costs. However, compliance costs do not fully explain the results: part of the decline seems to be driven by collateral effects of compliance, particularly the diversion of managerial attention from core business activities and/or adjustments to financial valuation or reporting practices. The data also show that risk-taking did not change significantly and that although managers closed funds and launched fewer funds in response to the law, this behavior did not result in lower assets under management.
A Simple Law for the Distribution of Long-Term Profit: The Empirical Regularity Behind the 1% of Firms That Capture 73% of Value
Phebo Wibbens
Organization Science, forthcoming
Abstract:
Empirical laws and regularities, such as Klepper’s shakeout pattern for industry evolution or Gibrat’s law for firm size, have shaped our understanding of organizations. Despite decades of research into profit patterns, no such widely applicable empirical regularities have been found for the “dependent variable of strategy”: long-term value capture. This study reports the discovery of a simple law governing this variable’s distribution. A four-parameter normal log-normal (NLN) mixture distribution very well fits observed data of listed firms’ 20-year long-term profit (LTP). The distribution correctly describes, for instance, a remarkable asymmetry in value capture: fewer than 1% of all firms in the data set generated 73% of the total LTP. Though the NLN law applies across different industries, geographies, and time periods, its distributional parameters vary. These parameters provide a novel and precise description of differences across settings in economic outcomes, such as the rise of “superstars.” More broadly, the law’s discovery raises profound questions relating to competitive strategy, evolutionary path dependence, the structure of technological opportunity, and social inequality. Code and data for replication are made available.
Are Short-Selling Restrictions Effective?
Yashar Barardehi et al.
Management Science, forthcoming
Abstract:
Despite strong theoretical predictions based on disagreement, limited empirical evidence links short-selling restrictions to higher prices. We test this relationship using quasi-experimental methods based on rule 201, a threshold-based policy that restricts aggressive short selling when intraday returns cross −10%. When comparing stocks on either side of the threshold in the same hour of trading, we find that the restriction leads to 8% lower short-sale volume and 35 basis points higher daily returns. These price effects do not reverse after the restriction is lifted.
Local IPOs and Household Stock Market Participation
Feng Jiang, Michelle Lowry & Yiming Qian
Review of Finance, forthcoming
Abstract:
The decrease in companies going public has received widespread attention, and the associated costs are widely debated. We document high local IPO activity leads to increases in stock market participation of 5–6%. This is striking given that such participation represents a key factor toward building wealth. Local IPOs increase both households’ propensity to own stock and their percent equity holdings. The attention channel drives effects: local IPOs attract attention to the market, through increased information production and publicity. The wealth channel has little influence, consistent with local IPOs not generating wealth shocks for most households.
Promotional Press Releases and Investor Processing Costs
Caleb Rawson, Brady Twedt & Jessica Watkins
Management Science, forthcoming
Abstract:
Press releases are a primary disclosure channel firms use to communicate with investors. However, firms can also use press releases to self-promote to improve their public image. Promotional press releases are, on average, significantly less value relevant than those focused toward investors. They also contain more positive and emotional language as well as less specific and financially oriented language. Based on theories of disclosure processing costs and investor attention, we predict and find that firms’ recent high usage of this disclosure channel to self-promote is associated with increased investor attention and more efficient reactions to subsequent investor-focused disclosures. This effect is concentrated in less visible firms, whereas promotional press releases appear to have no effect on the pricing efficiency of more visible firms. We also provide evidence consistent with media attention being one channel through which these effects operate. Our findings deepen our understanding of how firms use press releases as a disclosure channel and contribute to the literature on disclosure processing costs.
The Last Hurrah Effect: End-of-Period Temporal Landmarks Increase Optimism and Financial Risk-Taking
Avni Shah & Xinlong Li
Journal of Marketing Research, forthcoming
Abstract:
Understanding what drives risk-taking is fundamental for the study of choice under uncertainty. One widely discussed question is when and why people engage in risk-taking. Prior work finds evidence for an ending effect, where risk-taking increases on the last gamble in a series when outcomes are immediately realized. We test whether socially ubiquitous end-of-period temporal landmarks (e.g., last day of the work week, month, year) alter financial risk-taking even when outcomes are not immediate. Using data from a large peer-to-peer investment platform in the United States, we show that investors make riskier financial investment decisions on Fridays relative to those made earlier in the week. Consistent with a broader end-of-period effect, risk-taking also increases on the last day of the month, last day of the year, and on weekdays prior to a long weekend. Follow-up lab experiments identify a novel mechanism driving ending effects: As people near the end of a temporal period, they feel more optimistic that their financial risks will pay off, driving greater financial risk-taking. The shift in risk-taking is not without consequence: In our specific peer-to-peer context, we show that end-of-period investments perform worse over time, losing money relative to investments made on other days.
Skin or Skim? Inside Investment and Hedge Fund Performance
Arpit Gupta & Kunal Sachdeva
Management Science, forthcoming
Abstract:
Hedge fund managers contribute substantial personal capital, or “skin in the game,” into their funds. Although these allocations may better align incentives, managers may also strategically allocate their private capital in ways that negatively affect outside investors. We find that funds with more inside investment outperform other funds within the same family. This relationship is driven by managerial decisions to invest their own capital in their least-scalable strategies and restrict the entry of new outsider capital into these funds. Our results suggest that insider capital may work as a rent-extraction mechanism at the expense of fund participation of outside investors.