Knowledge that Transforms

SEC Rule10b5-1 plans are intended to limit the ability of insiders to trade opportunistically. We study insider stock sales by CEOs both under and outside of these plans. While both groups exhibit opportunism, this behavior is more limited in plan sales and non-plan sales in well-governed firms. Furthermore, opportunism in plan sales is greater for transactions representing a larger fraction of the CEO's firm-related wealth. CEOs can circumvent the intent of Rule 10b5-1 by exercising their discretion over financial reporting and real earnings management and appear to benefit from material nonpublic information by selectively cancelling plans or using limit orders.

We survey directors and investors on the objectives, constraints, and determinants of CEO pay. We find that directors face constraints beyond participation and incentives, and that pay matters not to finance consumption but to address CEOs’ fairness concerns. 67% of directors would sacrifice shareholder value to avoid controversy, leading to lower levels and one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Intrinsic motivation and reputation are seen as stronger motivators than incentive pay. Even with strong portfolio incentives, flow pay responds to performance to fairly recognize the CEO's contribution.

Size and value premia comove strongly with one another at low frequencies, but they are both negatively related to long-run movements in the equity premium. We explain these patterns in an investment-based asset pricing model featuring persistent micro and macro uncertainty. Micro uncertainty generates size and value premia waves, while macroeconomic uncertainty produces equity premium waves. The negative correlation between micro and macro uncertainty at low frequencies explains why the equity premium is a long-term hedge for size and value premia. Persistent micro uncertainty is also a source of instability for size and value factors in short samples.

How does common ownership affect innovation? We study this question using project-level data on pharmaceutical startups and their venture capital (VC) investors. We find that common ownership leads VCs to hold back projects, withhold funding, and redirect innovation at lagging startups. Effects are stronger where R&D costs are larger, consistent with common owners aiming to cut duplicate costs. Effects are also stronger where technological similarity is greater and preexisting competition is lower, consistent with common owners seeking market power for their surviving projects. Overall, common VC ownership appears to generate social benefits , via improved innovation efficiency, but also social costs.

We propose a model-free methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international stocks, bonds, and currencies in markets with frictions. We theoretically establish a SDF decomposition into one global factor and a currency basket. We show that our global factor prices a large cross-section of international asset returns , not just in- but also out-of-sample, across different currency denominations. Moreover, the pricing ability of the global factor is largely independent of the market structure or the size and type of market friction.

This paper studies the relation between volatility and informativeness in financial markets. We identify two channels (noise-reduction and equilibrium-learning) that determine the volatility-informativeness relation. When informativeness is sufficiently high (low), volatility and informativeness positively (negatively) comove in equilibrium. We identify conditions on primitives that guarantee that volatility and informativeness comove positively or negatively. We introduce the comovement score, a statistic that measures the distance of a given asset to the positive/negative comovement regions. Empirically, comovement scores (i) have trended downwards over the last decades, (ii) are positively related to value and idiosyncratic volatility and negatively to size and institutional ownership.

Does partisanship influence the way investors price financial assets? Using voter registration data of bankers originating large corporate loans, we show that bankers whose party differs from that of the U.S. President charge 7% higher loan spreads than other bankers. This effect holds regardless of borrowers’ partisanship, and becomes stronger for politically active bankers and when partisan media exhibit greater disagreement. Bankers do not match disproportionately with co-partisan borrowers but they lead syndicates more frequently with co-partisan bankers. Our results are not driven by bank or borrower fundamentals, but suggest that investor optimism, driven by political alignment, shapes asset prices.

The existing literature attributes the recent decay of stock market anomalies to increased arbitrage activities (e.g., Chordia, Subrahmanyam, and Tong, 2014; McLean and Pontiff, 2016; Green, Hand, and Zhang, 2017). In this paper, we present evidence that the apparent demise of several prominent classes of stock market anomalies is better explained by changes in underlying fundamentals. The attenuation of anomalies in the Momentum, Investment, and Profitability categories are accompanied by a reduced difference in fundamental performance between the long- and short-leg portfolios, as measured by the fundamental return from a two-capital investment CAPM. After accounting for the change in fundamental return, the attenuation of Investment and Profitability anomalies decreases to statistically insignificant levels. These results are consistent with the q-theory of investment, which attributes the attenuation of stock returns and fundamental returns of anomalies to the time variation in discount rates implied by fundamentals. We also show that neither academic publication nor proxies for increased arbitrage activities can explain the attenuation of these anomalies.