We propose a new, price-based measure of information risk called abnormal idiosyncratic volatility (AIV) that captures information asymmetry faced by uninformed investors. AIV is the idiosyncratic volatility prior to information events in excess of normal levels. Using earnings announcements as information events, we show that AIV is positively associated with informed return run-ups, abnormal insider trading, short selling, and institutional trading during pre-earnings-announcement periods. We find that stocks with high AIV earn economically and statistically larger future returns than stocks with low AIV. Taken together, our findings support the notion that information risk is priced.

This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailer’s purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. We test the model using both simulated and real data. The estimated relations are consistent with the model’s predictions and are statistically and economically significant.

This study examines the role of independent directors’ network centrality in bank risk-taking. Following the shareholder-incentive hypothesis and social-network theory, we predict and find that independent directors’ connectedness is positively associated with bank risk-taking. The results hold after a battery of robustness checks and endogeneity tests. Furthermore, consistent with the influence channel of networks, we show that connectedness empowers independent directors, whereas influential independent directors facilitate aggressive investment. We also find that the risk-taking effects are more pronounced for complex banks and banks with higher equity capital, higher income diversity, and lower cost-efficiency.

Professional audit firms increasingly engage in Corporate Social Responsibility (CSR) activities. This paper examines the effect of audit firms' CSR activities on auditors’ reputation. We find that audit firms that engage in CSR experience an increase in the size of their client base compared to audit firms that do not engage in CSR. The effect is stronger for audit firms without existing reputation from a Big 4 brand name or industry specialization. We also find that clients that value CSR are more likely to hire audit firms that engage in CSR. Overall, our results suggest that CSR is an effective tool for audit firms to build their reputation in the marketplace.

Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests poor choices are partially due to fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.

We provide large-scale evidence on the occurrence and value of FinTech innovation. Using data on patent filings from 2003 to 2017, we apply machine learning to identify and classify innovations by their underlying technologies. We find that most FinTech innovations yield substantial value to innovators, with blockchain being particularly valuable. For the overall financial sector, internet of things (IoT), robo-advising, and blockchain are the most valuable innovation types. Innovations affect financial industries more negatively when they involve disruptive technologies from nonfinancial startups, but market leaders that invest heavily in their own innovation can avoid much of the negative value effect.ReceivedMay 31, 2017; editorial decision September 30, 2018 by Editor Andrew Karolyi.

In portfolio risk minimization, the inverse covariance matrix of returns is often unknown and has to be estimated in practice. Yet the eigenvalues of the sample covariance matrix are often overdispersed, leading to severe estimation errors in the inverse covariance matrix. To deal with this problem, we propose a general framework by shrinking the sample eigenvalues based on the Schatten norm. The proposed framework has the advantage of being computationally efficient as well as structure-free. The comparative studies show that our approach behaves reasonably well in terms of reducing out-of-sample portfolio risk and turnover.

We uncover a positive stock market risk-return tradeoff after controlling for the covariance of market returns with the value premium. Fama and French (1996) conjecture that the value premium proxies for investment opportunities; therefore, by ignoring it, early specifications suffer from an omitted variable problem that causes a downward bias in the risk-return tradeoff estimation. We also document a positive relation between the value premium and its conditional variance, and the estimated conditional value premium is strongly countercyclical. The latter evidence supports the view that value is riskier than growth in bad times, when the price of risk is high.

We extend William Rogerson's (2003) intriguing analysis of simple procurement contracts to settings where the supplier's innate production cost is not necessarily distributed uniformly. Although the simple contract that Rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely, it can perform poorly when the larger cost realizations are relatively likely. We show that in all settings under consideration, a simple pair of contracts – one that involves linear cost sharing and one that involves full cost reimbursement – can always secure more than 73 percent of the gain achieved with a fully optimal contract.

This paper utilizes wealth shocks from winning lottery prizes to examine the causal effect of financial resources on fertility. We employ extensive panels of administrative data encompassing over 0.4 million lottery winners in Taiwan and implement a triple-differences design. Our analyses reveal that a substantial lottery win can significantly increase fertility, the implied wealth elasticity of which is around 0.06. Moreover, the primary channel through which fertility increases is by prompting first births among previously childless individuals. Finally, our analysis reveals that approximately 25% of the total fertility effect stems from increased marriage rates following a lottery win.