Knowledge that Transforms

Recent literature shows that investors’ revealed beliefs often point to the use of comparatively simple valuation approaches or heuristics rather than complex models with several dimensions of systematic risk to price assets. Against this background, we comprehensively analyze how different stock-level performance measures affect media tone in firm-specific articles in several major markets. While the realized risk-adjusted abnormal returns of all tested models are positively related to media sentiment, the CAPM-adjusted return as well as the raw stock return have the strongest impact in direct comparisons. Overall, the results are most consistent with the conjecture that, on average, reporting tends to be influenced more by straightforward valuation approaches than by risk adjustments derived from multi-factor asset pricing models. Further largely supportive evidence comes from return decompositions, subsample tests, reporting about mutual funds as well as from survey results.

A familiarity bias of target shareholders allows bidders to opportunistically choose the payment method in mergers and acquisitions. We employ the Stambaugh, Yu and Yuan (2015) mispricing score to identify overvalued bidders, reconfirming that overvaluation is a central driver of the payment choice. Using an instrumental variable based on exogenous price pressure, we provide causal evidence for bidder opportunism. Further analyses show that target shareholders more familiar with the bidder are more likely to accept equity despite particularly adverse market reactions. Our results suggest that behavioral biases of shareholders contribute to the transmission of stock market inefficiencies to the market for corporate control.

This paper investigates the relation between crowded trades, those in which many investors hold the same stocks possibly exhausting their liquidity provision, and future stock returns on a set of well-known stock market anomalies. We find that anomaly risk-adjusted returns are primarily generated by the most (least) crowded stocks for the long-leg (short-leg) portfolio. Moreover, we find that our results remain significant after publication dates. We hypothesize that crowded equity positions in anomaly stocks increase institutional investors’ exposure to crash risk. Our findings are consistent with this hypothesis and suggest that crowding adds a new consideration to the limits of arbitrage.

This paper develops time-varying repayment mortgage contract designs based on borrower income expectations and risk profiles over loan age. These contract designs differ between loans and are based on growing annuities. We benchmark these contracts to the traditional 30-year fixed-rate mortgage contracts. The proposed contract innovations reduce illiquidity but increase leverage due to payment delays. The combined effects reduce the probability of default, systematic risk, and regulatory capital. Due to the risk reduction, lenders can increase the gross return on regulatory capital by 10 percent, or alternatively, borrowers may benefit from credit spreads that are 17 basis points lower. Overall, our contracts enhance the resilience of mortgage markets. JEL: G01; G20; G21; C51, C55