This article shows that mutual funds’ trading experiences bias their future repurchasing decisions. Mutual funds are less likely to repurchase a stock if they previously sold the stock for a loss rather than for a gain. After switching to managing a different fund, fund managers still avoid repurchasing stocks they sold for a loss at a past fund. We do not find that mutual fund managers are biased against repurchasing past loser stocks because of superior information. Though less likely to be repurchased, repurchased losers do not underperform repurchased winners—and the fund itself—in the subsequent quarter.
We study the role of logistics information in the stock price discovery process. Using a proprietary dataset on parcel-level express delivery service records from one of the largest express service providers in China, we find that express delivery contains firm-specific information for stock pricing. A long/short portfolio of buying (selling) stocks with high (low) quarterly growth in the number of parcels sent by firms generates an 8.23 percent risk-adjusted annual return. The return predictability is more significantly driven by document, light, and business-to-business parcels, which reflects the intensity of a firm’s overall operations (rather than just sales growth), and by parcels sent to new addresses, which represents new business expansion. Echoing this return predictability, parcel growth also predicts firm growth, profitability, and earnings surprises. Finally, we provide evidence on return predictability associated with topology of logistic network identified by parcel delivery data.
We identify start days of 156 episodes of social unrest from textual analysis of media reports and show a systematic negative impact of social unrest on stock market performance. Social unrest on average leads to a 1.4 percentage point drop in cumulative abnormal returns in 2 weeks, more for events that last longer and that happen in emerging markets. Stronger institutions, particularly better governance and more democratic systems, are associated with a smaller adverse impact of social unrest on stock market returns. We argue this reflects the ability of better institutions to provide a more reliable way to reconcile conflicting views and dampen uncertainty after unrest.
In their indisposed paper, Aswani, Raghunandan, and Rajgopal (ARR) provide a critique of our main findings on the pricing of carbon transition risk in Bolton and Kacperczyk (2021a, 2021b, 2022) and in Bolton, Halem, and Kacperczyk (2022). We take exception to the key elements of their critique. The main findings of their analysis do not contradict our findings. Rather, they corroborate some of our own findings. However, they choose to take a different interpretation from ours based on selective evidence. A large asset-pricing literature seeks to explain the cross-sectional pattern of stock returns based on exposures to aggregate risk factors such as size and book-to-market ratios or firm-specific risk linked to observable firm characteristics. In our empirical studies, we have systematically explored whether investors demand a carbon risk premium as compensation for their exposure to carbon transition risk. We have looked at how stock returns vary with CO2 emissions across firms, industries, and countries and have found consistent evidence around the world of a carbon risk premium for stock returns, and a carbon valuation discount for price–earnings and book-to-market ratios. We have further found that the carbon premium has jumped after the Paris agreement. There was no significant premium right before the Paris agreement but a highly significant and large premium after the agreement.
We find that short sellers manage risks by strategically borrowing shares in stocks with significant ownership by passive investors. This practice increases securities lending demand for stocks with substantial passive ownership, resulting in improved price efficiency, higher lending fees, and increased short interest in these stocks. Consistent with the risk mitigation motive, these stocks show reduced risks of unexpected fee hikes and loan recall, longer loan durations, and attract more informed short sellers. These effects are particularly pronounced in hard-to-borrow stocks where short-sale constraints are binding. Our study suggests that passive investing helps alleviate short-sale constraints by reducing the risks associated with stock borrowing.
We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets.
This article documents fund usages of insider share pledge loans based on transactions data and subsequent corporate activities in Chinese firms. We find that the market has expanded 111 times since 2003, reaching 2.9 trillion RMB by 2017. The expansion is driven by share pledges for financing firms, including focal listed firms and other firms. Among transactions for financing focal listed firms (17.4 percent), 87 percent of the funds flow into the firms. Each 1 percent increase in controlling shareholders’ ownership is associated with a 7.8–11.7 percent increase in the likelihood of pledging shares to finance the focal listed firms and an additional 2.1–5.7 percent for financially constrained firms. The stock market reacts to transactions for financing focal listed firms with abnormal returns around 0.26–0.65 percent and an additional 0.29–4.37 percent for financially constrained firms. These patterns do not exist for share pledges for other purposes or by noncontrolling shareholders.
Under a randomized setting, this article finds workers with entrepreneurial ambitions—intended entrepreneurs—are (1) far more common than workers with past entrepreneurial experience and (2) increase the rate of entrepreneurship among their peers. Peer effects are persistent, stronger for tighter networks, and extend to the decision to join a startup. As intended peers explain half of the variation in entrepreneurship rates in our sample, our results demonstrate that intended entrepreneurs, even those that never personally start a firm, represent a vital component of the entrepreneurial ecosystem.
How are contracts structured in the presence of relationship-specific investments when legal enforcement is weak? Using a new audit methodology, we show that simple financial contracts in combination with social norms and reputation concerns can sustain relationship-specific transactions. Wholesalers in the market for pens in India use upfront payments rather than increased risk premiums to mitigate risks arising from relationship-specific investments. Upfront payments for printed pens cover only 40 percent of the production costs, highlighting the importance of upfront payments as a screening device. Ex-post, renegotiation is more likely for printed pens, but in a substantial fraction of cases, renegotiation fails.
Using exogenous shocks on the ability to issue seasoned equity offerings (SEOs), we show SEOs lead to a higher employee skill composition, that is, a lower (higher) proportion of low (high) skilled workers. The decrease in low-skilled workers exceeds the increase in high-skilled workers, resulting in reduced employment at the firm level. These effects are more significant when firms invest more in technology following SEOs and face greater financial constraints before SEOs, suggesting that SEOs relieve budget constraints on technology investments. These findings demonstrate that while external equity financing helps upgrade technology to improve productivity, it has a dark side for low-skilled workers.