Trades
Investor Behavior at the 52 Week High
Joshua Della Vedova, Andrew Grant & Joakim Westerholm
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
This study uncovers how household investors intensify the effect of the 52 week high (52WH): increased volume and momentum-like returns at the 52WH price. Using daily household and institutional trading data, we find that households sharply increase their selling, particularly with limit orders at the 52WH price. This behavior is indicative of anchoring, as it is robust to past returns and intensified by proximity, market uncertainty, and salience of the 52WH. This uninformed limit order selling at and prior to the 52WH leads to a doubling of unconditional 52WH anomaly returns. Post-event returns benefit institutions, which act as counterparties.
Uncle Sam’s Stimulus and Crypto Boom
Jeremy Bertomeu, Xiumin Martin & Sheryl Zhang
Washington University in Saint Louis Working Paper, January 2023
Abstract:
This study examines the impact of government financial assistance during the COVID-19 pandemic on the demand for crypto assets and the effect of crypto interest on the stated goals of stimulus programs. Government lending to small businesses (PPP) significantly increased households’ interest in crypto assets. Using a Bartik instrumental variable for PPP distribution, we find that a one standard deviation increase in PPP disbursement is associated with an increase in crypto-related Google searches. A 100% percent increase in PPP disbursements is also accompanied by a 2% increased number of new wallets, 10% higher trading volume, 23% higher miners’ revenue, and a shift from large to small addresses, suggesting that government assistance increases the demand for cryptos, particularly among new, retail investors. We further find that about 5-14% of PPP loans are diverted to crypto assets, rendering PPP less effective in maintaining employment. Our results are stronger for MSAs with a less educated population, supporting a house money explanation.
The Demise of the NYSE and NASDAQ: Market Quality in the Age of Market Fragmentation
Peter Haslag & Matthew Ringgenberg
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
U.S. equity exchanges have experienced a dramatic increase in competition from new entrants, resulting in the fragmentation of trading across venues. While market quality has generally improved over this period, we show most of the improvements have accrued to the largest stocks. We then show this bifurcation in market quality is related to the fragmentation of trading. Theoretically, more exchange competition should reduce trading costs, yet it may also increase adverse selection for liquidity providers, leading to higher spreads. We document evidence of both effects -- fragmentation improves market quality for large stocks while small stocks experience relatively worse quality.
Bitcoin Mining Meets Wall Street: A Study of Publicly Traded Crypto Mining Companies
Hanna Halaburda & David Yermack
NBER Working Paper, February 2023
Abstract:
This paper studies the operations and financial valuations of 13 cryptocurrency mining companies that are listed on the NASDAQ stock exchange and have facilities in North America. We find that miners using Texas wind power are offline more than other miners, in a more erratic pattern, while receiving significant revenue augmentations from “curtailment” payments by electric utilities. Despite having relatively low activity levels, these Texas miners are more profitable than those using more stable sources of energy such as hyrdo power or solar power, as reflected in significantly higher enterprise values. We find a negative and significant beta between crypto mining stocks and an index of electric utilities, suggesting that ownership of a crypto mining company might provide a useful channel for risk management in the electric power industry.
Mortality, Mutual Fund Flows, and Asset Prices
Alok Kumar, Ville Rantala & Claudio Rizzi
University of Miami Working Paper, December 2022
Abstract:
Motivated by the observation that elderly liquidate their mutual fund holdings regularly, we examine whether mortality patterns have a predictable impact on aggregate mutual fund flows and asset prices. Our key conjecture is that periods with high mortality rates would be associated with higher net fund inflows because aggregate withdrawals decline. Consistent with our conjecture, we find that fund inflows are more positive during high mortality months, even after accounting for known seasonality in fund flows. This relation is stronger among funds that cater to older investors, such as high dividend yield funds and high bond allocation funds. We also find that high mortality exposure stocks consistently earn abnormal returns during abnormal mortality months. Collectively, our evidence indicates that mortality-induced demographic shifts impact the mutual fund industry and stock prices.
Negative Sentiment and Aggregate Retail Trading: Evidence from Mass Shootings
Tianchen (Hugo) Zhao
University of Maryland Working Paper, February 2023
Abstract:
I analyze the role of sentiment in aggregate retail investors’ trading activity. Using mass shootings as exogenous, non-economic and negative shocks to investor sentiment, I find that retail investors on average net sell stocks of firms headquartered in the states where mass shootings took place in the previous week ("local stocks''). During the week after mass shootings, the average decrease in daily retail share volume order imbalance for local stocks is around 8% of the sample mean. Consistent with lower sentiment-driven trading, the retail net divestment from local stocks increases in the number of victims from mass shootings, and is more pronounced following unsolved shootings and shootings with teenager victims. Consistent with predictions from sentiment models, local stocks earn lower returns only in the week after shootings. Finally, institutional investors do not react to mass shootings, which suggests that retail investors are more prone to sentiment.
How Informative Are Insider Trades and Analyst Recommendations?
Jim Hsieh, Lilian Ng & Qinghai Wang
Journal of Banking & Finance, forthcoming
Abstract:
This study evaluates the interactions between, and informativeness of, insider trading and analyst recommendations. We find that analyst recommendations significantly affect subsequent insider trading, but not vice versa. Surprisingly, in aggregate, insiders buy more shares following analyst downgrades and sell more shares following upgrades. This pattern persists even after controlling for analysts’ momentum and insiders’ contrarian trading preferences. Analysts, in contrast, do not systematically take into account insider trading when revising their recommendations. More importantly, we show that these two information signals complement each other although insider buying could be a singularly strong signal that substitutes the informativeness of analyst recommendations under certain circumstances. Overall, our findings highlight the important dynamics and financial market consequences between the two crucial groups of information providers.
Star Firms, Information Externalities, and Predictability
Vidhi Chhaochharia et al.
University of Miami Working Paper, January 2023
Abstract:
We study information externalities of industry “star firms” (Gutiérrez and Philippon, 2019). Our results indicate that earnings shocks to star firms contain useful information about the future unexpected earnings and earnings surprises of other firms in the same industry. This information is not immediately reflected in analyst forecasts and stock prices, which generates predictability in returns. We also find evidence of lead-lag relations in the returns of star and nonstar firms. Plus, pricing anomalies among star firms affect the anomalies among nonstar firms. Together, these findings provide valuation-based evidence of the economic importance of star firms and demonstrate that their influence in financial markets has remained significant.
Is There Smart Money? How Information in the Commodity Futures Market Is Priced into the Cross-Section of Stock Returns with Delay
Steven Wei Ho & Alexandre Lauwers
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We document a new empirical phenomenon in which the aggregate positions of money managers, who are sophisticated speculators in the commodity futures market, as disclosed by the Disaggregated Commitments of Traders reports, can predict the cross-section of commodity producers’ stock returns in the subsequent week. We employ a number of cross-sectional methods, including calendar-time regression analysis, single-sort, double-sort, and Fama–MacBeth regressions, to confirm the predictability results. The results are more pronounced in firms with higher information asymmetry. We thus add more empirical evidence to the literature on costly information processing, which leads to gradual information diffusion across asset markets.
RegTech Adoption and the Cost of Capital
Sandy Lai, Chen Lin & Xiaorong Ma
Management Science, forthcoming
Abstract:
This paper studies the cost of capital effect of a major regulatory technology, or RegTech, event: the staggered implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system of the Securities and Exchange Commission in the period from 1993 to 1996. This event represents a largely exogenous shock to corporate information dissemination technologies, resulting in a considerable reduction in information acquisition costs for investors. Using a difference-in-differences research design, we show that the cost of equity capital declines substantially after a firm switches from paper filing to mandatory electronic filing in EDGAR. The effect is stronger for small firms and firms with low analyst coverage and low institutional ownership. We identify three channels through which EDGAR affects a firm’s cost of capital: the liquidity, risk-taking, and corporate governance channels. EDGAR implementation also improves a firm’s investment efficiency significantly. We find evidence that the marginal value of a firm’s capital investment and cash is higher during the post-EDGAR period.