We investigate whether security analysts exhibit persistence in their stock picking ability. We find that analysts whose recommendation revisions earned the most (least) excess returns in the past continue to outperform (underperform) in the future. Further, the market recognizes these performance differences in the five-day period surrounding the recommendation revision. This market reaction, however, is incomplete. Excess returns in the one and three trading months following the revision are significant and positively associated with analysts’ prior performance. However, a trading strategy taking long (short) positions in recommendation upgrades (downgrades) conditional on analysts’ prior performance is unprofitable.

This paper investigates the effect of share repurchase through transferable put rights (TPRs) on shareholder wealth and corporate control. Transferable put rights make the put option, which is implicit in a tender offer, marketable. Shareholders who do not tender their shares increase their proportional ownership of the firm and extract some of the gains of the tender offer from exiting shareholders. Finally, TPRs improve tax efficiency by ensuring that only shareholders who have the highest tax bases will tender.

Although firm-initiated clawbacks reduce accounting manipulation, they also induce managers to engage in suboptimal activities (e.g., reduce research and development (R&D) expenses) to achieve earnings targets. To assess the effectiveness of clawback provisions, we examine their impact from debtholders' point of view. We find that banks use more financial covenants and performance pricing provisions in the loan contracts and decrease interest rates after firms initiate clawbacks. Moreover, we also find that loan maturity increases and loan collateral decreases subsequent to clawback adoption. Taken together, our findings indicate that firm-initiated clawback provisions enhance financial reporting quality, thereby reducing the information uncertainty that financing providers face.

We classify asset pricing anomalies into those exacerbating mispricing (build-up anomalies) and those resolving it (resolution anomalies). We estimate the dynamics of price wedges for well-known anomaly portfolios and map them to firm-level mispricings. We find that several prominent anomalies like momentum and profitability further dislocate prices. Multi-factor models designed to eliminate one-month alphas still produce large price wedges. Our estimates yield a novel decomposition of Tobin’s q, revealing that q’s mispricing component has substantial explanatory power for firm investment. Overall, our results suggest that financial intermediaries chasing build-up anomalies negatively affect price efficiency and associated real capital allocation.

Material news events can be potentially important sources of jumps in stock returns. We collect 21 million news articles associated with more than 9000 publicly-traded companies and use textual analyses to derive measures to summarize the news. We find that stock return jumps (including time-variation in jump-size distributions and jump intensity) are significantly related to news flow frequency and content and those effects increase substantially over the last few decades. The sensitivity of jump probability to news is stronger for firms with higher media visibility, analyst coverage, and institutional ownership. This sensitivity also varies across different news categories.

This paper examines the pricing of volatility risk and idiosyncratic volatility in the cross-section of corporate bond returns for the period of 1994–2016. Results show that bonds with high volatility betas have low expected returns, and this negative relation appears in all segments of corporate bonds. Further, bonds with high idiosyncratic bond (stock) volatility have high (low) expected returns, and this relation strengthens as ratings decrease. Conventional risk factors and bond/issuer characteristics cannot account for these cross-sectional relations. There is evidence that the effect of idiosyncratic stock volatility on expected bond returns works through the channel of contemporaneous stock returns.

We investigate competition between traditional stock exchanges and new dark trading venues using an important difference in regulatory treatment. Securities and Exchange Commission required minimum pricing increments constrain some stock spreads, causing large limit order queues. Dark pools allow some traders to bypass existing limit order queues with minimal price improvement. Using a regression discontinuity design, we find that spread constraints significantly weaken exchanges׳ competitiveness. As more orders migrate to dark pools, the probability of subsequent order execution there increases, raising liquidity. The ability to circumvent time priority of displayed limit orders is one cause of the rapid rise in US equity market fragmentation.

We hypothesize that the well-documented negativity bias, the psychological tendency to asymmetrically emphasize negative over positive aspects, can help explain several financial market phenomena: why most individuals hold strongly bearish views of both short- and long-term equity return distributions, why individuals exhibit heterogeneous beliefs, and the stock market participation puzzle. Using variation in the perceived risk of mortality from the swine flu pandemic as our primary proxy for an individual's negativity bias, we find strong support for our hypothesis even when controlling for alternative mechanisms including optimism, risk aversion, ambiguity aversion, and anxiety.

We develop a theory of new-project financing and equity carve-outs under heterogeneous beliefs. In our model, an employee of a firm generates an idea for a new project that can be financed either by issuing equity against the cash flows of the entire firm (“integration”), or by undertaking an equity carve-out of the new project alone (“non-integration”). While the patent underlying the new project is owned by the firm, the employee generating the idea needs to be motivated to exert optimal effort for the project to be successful. The firm's choice between integration and non-integration is driven primarily by heterogeneity in beliefs among outside investors (each of whom has limited wealth to invest in the equity market) and between firm insiders and outsiders: if the marginal outsider financing the new project is more optimistic about the prospects of the project than firm insiders, and this incremental optimism of the marginal outsider over firm insiders is greater regarding new-project cash flows than that about assets-in-place cash flows, then the firm will implement the project under non-integration rather than integration. Two other ingredients driving the firm's financing choice are the cost of motivating the employee to exert optimal effort, and the potential synergies between the new project and assets in place. We derive a number of testable predictions regarding a firm's equilibrium choice between integration and non-integration. We also provide a rationale for the “negative stub values” documented in the equity carve-outs of certain firms (e.g., the carve-out of Palm from 3Com) and develop predictions for the magnitude of these stub values.

This paper develops a noisy rational expectations model of the way in which international investors adjust their expectations of asset payoffs in a given country in response not only to public information signals but also to private information signals whose precision differs across investors. The model predicts that the perceptions of investors in one country about the future market returns in another country are related differently to realized past returns depending on their informational disadvantage relative to other investors: the greater is that informational disadvantage, the greater is the change in perception associated with returns. The predictions are confirmed by monthly survey data of institutional money managers investing in developed markets from 1995 to 2000.