This paper examines the agency conflicts between shareholders and bondholders of multinational and non-multinational firms and provides an explanation for the puzzle that multinational firms use less long-term debt, but more short-term debt than domestic firms. Using a sample of 6951 firm–year observations for multinational and domestic firms over the 1988–1994 period, we find that alternative measures of agency costs have statistically significant negative effects on the firm's long-term leverage. The results, however, also show that the negative effects of agency costs of debt on long-term leverage are significantly greater for multinational than non-multinational firms. It is documented that the effect of the agency costs of debt on leverage are increased by the firm's degree of foreign involvement. The evidence shows that firm's increasing foreign involvement exacerbates agency costs of debt leading to lower (greater) use of long-term (short-term) debt financing. This result is also confirmed using alternative measures of foreign involvement. The evidence is consistent with the view that multinational corporations (MNCs) are susceptible to higher agency costs of debt than domestic corporations because geographic diversity renders active monitoring more difficult and expensive in comparison to domestic firms. The results fail to support the view that MNCs' lower long-term debt ratios are due to the advantages of the internal capital markets.

We show that political geography has a pervasive effect on the cross-section of stock returns. We collect election results over a 40-year period and use a political alignment index (PAI) of each state's leading politicians with the ruling (presidential) party to proxy for local firms’ proximity to political power. Firms whose headquarters are located in high PAI states outperform those located in low PAI states, both in terms of raw returns, and on a risk-adjusted basis. Overall, although we cannot rule out indirect political connectedness advantages as an explanation of the PAI effect, our results are consistent with the notion that proximity to political power has stock return implications because it reflects firms’ exposure to policy risk.

Foreign migration flows have important stock market consequences. Foreign-born resident networks within U.S. Metropolitan Statistical Areas (MSAs) are associated with excess return comovement between locally headquartered stocks and American Depositary Receipts (ADRs) from countries with ties to the MSA through the network of foreign-born residents. This comovement is hardly due to correlated fundamentals and at least partially driven by correlated trading within members of a common investor base consisting of foreign-born residents. Our evidence has implications for both investors and foreign multinational corporations (MNCs) seeking to reap benefits from cross-listings and is consistent with the notion that foreign-born residents exhibit both local bias and home (country) bias.

In this paper we examine the relation between equity mispricing and arbitrage risk and find that stocks with high arbitrage risk have higher estimated mispricing than stocks with low arbitrage risk. These results are not limited to high book-to-market or small capitalization stocks, and they are not sensitive to transaction and short-selling costs. In addition, they remain robust to alternative multifactor return generating specification models and mispricing measures. Overall, our empirical results are consistent with the conjecture that mispricing is a manifestation of the inability of arbitrageurs to hedge idiosyncratic risk, a major deterrent to arbitrage activity.

In this paper, we examine the relation between stock returns and analysts' heterogeneous expectations. We find that stock returns are positively associated with divergence of opinion. Our evidence provides no support for Miller's (1977) overvaluation hypothesis, which predicts lower (higher) future returns for high (low) divergence of opinion stocks in the presence of short-selling constraints. Our findings are based on the use of the diversity measure, which is free from the confounding effects of uncertainty in analysts' forecasts and is therefore a more accurate measure of divergence of opinion than dispersion. Our results refute the view that dispersion in analysts' forecasts reflects divergence of opinion. Our evidence is robust to the use of alternative measures of short-selling constraints, time intervals, optimism in analysts' forecasts, and herding in analysts' behavior.

We posit that investor distraction can be exogenously triggered by allergy onset's degrading effects on local investors’ health and cognitive functioning. We document that allergy onset is related to lower trading activity. We use daily pollen counts to measure the severity of allergy onset at different locations and show that stocks of firms located in areas with severe allergy problems exhibit declines in trading volume and lower stock returns. Moreover, allergy onset is associated with both a decline in investor demand for firm information, as proxied by Google search volume, and stock underreaction to earnings news. Collectively our evidence supports the notion that the association of allergy onset and stock market outcomes may be emerging through a local investor distraction channel.

The well-documented underperformance of lottery stocks masks a within-month cyclical pattern. Demand for lottery stocks increases at the turn of the month, especially in areas whose demographic profile resembles that of typical lottery-ticket buyers (i.e., gamblers), thus driving their prices higher. This effect is rooted in local retail investors’ preference for lottery stocks and propelled by the within-month cyclicality of local investors’ personal liquidity positions. A long-short investment strategy based on this cyclical pattern of lottery stocks’ performance yields gross abnormal returns of about 12.6% per year.

We examine price reactions to U.S. firms’ earnings announcements during Easter week in order to analyze whether and how the religious holiday calendar impacts investors’ information processing. We find that there is an asymmetric pattern of immediate and delayed responses to earnings surprises experienced during Easter, entailing similar immediate reactions to both good and bad news and a stronger delayed response to bad news. Moreover, local religious characteristics affect investor’s response to firm news. The results are consistent with a religion-induced distraction effect on investors’ information processing ability. We also show that this effect can form the basis for a profitable trading strategy. The findings highlight the importance of religion for firms’ information environment and for the local component of stock prices.

We show that firm headquarters’ geographic proximity to political power centers (state capitals) is associated with higher abnormal returns. Consistent with the notion that this effect is rooted in social network links, we find it is more pronounced in communities with high levels of sociability and political values’ homophily, and that it dissipates when firms move their headquarters to another state. Finally, in line with the view that investors perceive such networks to be associated with political risk, we find that this effect is particularly strong when there are substantial levels of corruption, dependency on government spending, and politicians’ turnover.

We investigate whether and how well firms’ stock market valuations reflect their employees’ collective skills and effectiveness relative to that of their industry peers and competitors. We devise a relative stock market valuation measure of human capital intangibles (EVHC) and find that portfolios of low EVHC firms systematically outperform portfolios of high EVHC firms by an average 1.34% per month. However, this is primarily a small firms effect, because for large firms the excess returns of the arbitrage portfolio that is long on the low EVHC stocks and short on the high EVHC stocks is zero. Our results suggest that reliance on human capital intangibles may proxy for risk not fully accounted for by conventional asset pricing models, or alternatively, that the market cannot correctly price human capital intangibles for small size firms.