|Robin Greenwood, Harvard
University and NBER; and Samuel Hanson, Harvard University
"Catering to Characteristics"
When investors overvalue a particular firm characteristic, corporations
endowed with that characteristic can absorb some of the demand by issuing equity. Greenwood
and Hanson use time-series variation in differences between the attributes of stock
issuers and repurchasers to shed light on characteristic-related mispricing. During years
when issuing firms are large relative to repurchasing firms, for example, large firms
subsequently underperform. This holds true even when the authors restrict attention to the
returns of firms that do not issue at all, suggesting that issuance is partly an attempt
to cater to broad time-varying patterns in characteristics mispricing. Their approach
helps forecast returns to portfolios based on book-tomarket (HML), size (SMB), price,
distress, payout policy, profitability, and industry. These results are consistent with
the view that firms play an important role as arbitrageurs in the stock market.
Grinblatt, UC, Los Angeles; Matti Keloharju, Helsinki School of
Economics; and Juhani Linnainmaa, University of Chicago
Investors Outperform Dumb Investors?"
Grinblatt, Keloharju, and Linnainmaa analyze
whether high IQ investors exhibit superior investment performance. They combine equity
return, trade, and limit order book data with two decades of scores from an intelligence
test administered to nearly every Finnish male of draft age. Controlling for wealth,
trading frequency, age, and determinants of the cross-section of stock returns on each
day, they find that high IQ investors exhibit superior stock-picking skills, particularly
for purchases, and superior trade execution for both purchases and sales.
Joseph Engelberg, University of North Carolina at Chapel Hill; and Christopher
A. Parsons, University of North Carolina at Chapel Hill
"The Causal Impact of Media
in Financial Markets"
It is challenging to disentangle the causal impact of media reporting
from the impact of the events being reported. Engelberg and Parsons solve
this problem by comparing the behaviors of investors with access to different media
coverage of the same information event. They use zip codes to identify 19 mutually
exclusive trading regions, corresponding to 19 large U.S. cities and local newspapers (for
example, the Houston Chronicle). For all earnings announcements of S&P 500 Index
firms, local media coverage strongly predicts local trading, after the authors control for
characteristics of the earnings surprise, firm, local investors, and reporting
newspaper(s). Moreover, the local trading-local coverage effect: 1) depends precisely on
the specific timing of local reporting (that is, one day after the earnings announcement,
two days afterward, and so on.) and 2) disappears entirely during extreme weather events,
which leaves media content unchanged, but disrupts transmission to investors.
Malcolm Baker, Harvard Business School and NBER; Xin Pan,
Harvard University; and Jeffrey Wurgler, NYU Stern School of Business and
"A Reference Point Theory of Mergers
Baker, Wurgler, and Pan note that the use of
judgmental anchors or reference points in valuing corporations affects several basic
aspects of merger and acquisition activity including offer prices, deal success, market
reaction, and merger waves. Offer prices are biased toward the 52-week high, a highly
salient but largely irrelevant past price, and the modal offer price is exactly that
reference price. An offer's probability of acceptance discontinuously increases when the
offer exceeds the 52-week high; conversely, bidder shareholders react increasingly
negatively as the offer price is pulled upward toward that price. Merger waves occur when
high recent returns on the stock market and on likely targets make it easier for bidders
to offer the 52-week high.
Victor Stango, UC, Davis; and Jonathan Zinman,
"Limited and Varying Consumer
Attention: Evidence from Shocks to the Salience of Penalty Fees"
Stango and Zinman study the impact of varying attention
on the payment of bank account and credit card penalty fees. These fees are important
profit centers for firms, are often shrouded from consumers at account opening, and are
largely avoidable by consumers with small changes in behavior (meaning that inattention
might plausibly explain why some people pay fees). The researchers measure fee payment
using unusually rich, transaction-level, administrative data that spans multiple accounts,
across multiple providers and months, for each consumer. Variation in attention comes from
periodic surveys. Some surveys ask questions related to penalty fees, others do not. The
questions do not provide information, and the survey topics are not pre-announced when the
consumer chooses to take the survey. Conditional on selection into surveys, the authors
find, penalty fee payment drops sharply immediately following a survey, but only if the
survey contains a question on penalty fees. The reduction is short-lived when panelists
have taken few relevant surveys, but long-lived when panelists have taken many relevant
surveys. The results suggest that consumers have a stock of attention that periodic shocks
can help to build or maintain; in contrast, one-shot upfront shocks such as disclosures at
account opening may be ineffective or depreciate quickly.
Nicolae B. Garleanu, UC, Berkeley and NBER; and Lasse H.
Pedersen, New York University and NBER
"Margin-Based Asset Pricing
and the Law of One Price"
In a model with heterogeneous-risk-aversion agents facing margin
constraints, Garleanu and Pedersen show how securities' required returns are
characterized by their betas and their margins. Negative shocks to fundamentals make
margin constraints bind, lowering risk-free rates and raising Sharpe ratios of risky
securities, especially for high-margin securities. Such a funding liquidity crisis gives
rise to "bases," that is, price gaps between securities with identical
cash-flows but different margins. In the time series, bases depend on the shadow cost of
capital, which can be captured through the interest rate spread between collateralized and
uncollateralized loans. In the cross section, they depend on relative margins. The authors
apply the model to CDS-bond bases and other deviations from the Law of One Price and use
it to evaluate the Fed lending facilities.