Knowledge that Transforms

Abstract Past research has documented a substantial finance wage premium. We examine whether this premium reflects differences in lifetime career opportunities. Using resume data, we reconstruct career trajectories in finance and nonfinance sectors and build synthetic measures of career attractiveness that account for compensation levels, growth, and risk. We find that asset management and investment banking provide a sizable risk-adjusted career premium relative to banking, insurance, and other sectors. This premium has declined across cohorts, particularly relative to high tech. Labor-market entry patterns respond to these premia: potential entrants treat finance and high-tech careers as substitutes when choosing where to start.

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Abstract This article studies buybacks with two informed parties: a manager and an outside speculator. Buybacks introduce two countervailing forces. A competition effect reduces speculator profits when buybacks compete against speculative trades. A dispersion effect increases speculator profits: buying undervalued shares generates gains, while buying overvalued shares generates losses, widening the dispersion in per-share value across states. Sufficiently informed buybacks benefit shareholders; uninformed buybacks harm them. These effects vary with shareholders’ liquidity exposures. The desirability of informed buybacks depends on the prevalence of speculation. Authorization depends on ownership, governance, and market conditions. Shareholders might welcome informed buybacks—not merely tolerate them.

Abstract Does distrust in politically affiliated media induce a bias in investor beliefs? We study the acquisition of Dow Jones & Co. by News Corporation in 2007 as a shock to the political affiliation of Dow Jones outlets. Following the acquisition, the prices of Republican- (Democrat-) aligned stocks become less sensitive to favorable (unfavorable) Dow Jones Newswires (DJNW) sentiment, consistent with the market attaching less credibility to a politically affiliated source. There is, however, no evidence of change in DJNW sentiment, coverage, or language about Republican/Democrat stocks, suggesting a loss of stock price informativeness. Consistent with this view, a portfolio exploiting the attenuated reaction to DJNW news earns abnormal returns following 2007.

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Abstract Using a calibrated, collective life-cycle portfolio choice model for a dual-income couple, we show that an increase in the ability to share risk within the household due to a mean-preserving spread in the partners’ coefficients of relative risk aversion leads to a substantial increase in financial risk-taking. Importantly, we show that risk sharing has a larger economic impact on portfolio choice than risk diversification. While unitary models usually do not fully replicate the optimal portfolio choice of collective models, we propose approximations that work reasonably well for moderate background risk. We provide strong empirical support for our key findings.

Abstract We study the aggregate impact of information spillovers emerging from industry star firms. Changes in stars’ relative earnings growth predict future earnings growth, consensus earnings surprises, and job postings of same-industry nonstar firms. Star-firm performance also predicts industry-level GDP and employment growth. Price markup and innovation spillovers are potential channels underlying these patterns. Our results further show that this performance predictability is not fully incorporated into nonstars’ stock prices. A long–short portfolio based on star firms’ earnings growth earns an annualized 6-factor alpha of 8.7%. Together, our findings provide consistent evidence of the economic importance of star firms.

Abstract We examine how Confucian culture operates as an informal institution by fostering relational contracts that substitute for formal legal frameworks in shaping corporate behavior. Using data on historical Confucian academies near firms’ headquarters in China, we find that greater cultural exposure is associated with higher investment in stakeholder relationships—measured by social contribution, stakeholder protection, courtesy expenses, patenting, and trade credit. These effects persist after controlling for human capital and alternative cultural influences, and weaken in regions with stronger formal institutions. Our findings highlight the enduring role of culture in supporting trust-based governance when formal contracting is limited.

Abstract In contrast to the “lazy prices” phenomenon in the stock market, more 10-K textual changes lead to larger increases in volatility smirks—consistent with options traders buying more out-of-the-money put options based on negative information disclosed in textual changes. Moreover, the lazy-prices effect is mainly driven by stocks with tradable options, suggesting that limits to arbitrage lead to a delayed response of stock prices. Finally, the return predictability of textual changes is stronger for stocks with larger option volatility smirk changes. Sophisticated options traders, therefore, demonstrate superior skills at extracting relevant information from public filings.

Abstract While the Dodd–Frank Act (DFA) mandates board risk committees for large banks, we argue that such committees do not benefit all banks. Banks forced by the DFA to adopt a board risk committee do not experience a reduction in risk following adoption. In contrast, banks that voluntarily established risk committees before the DFA exhibit lower risk, especially when these committees possess greater risk expertise. Using unique interview data, we find that board risk committees serve as active monitors rather than merely rubber-stamping management proposals. However, regulatory-mandated tasks limit their monitoring role.