Knowledge that Transforms

We explore the impact of weather on trading by individual investors. Over a time span of 94 months, we analyze daily trading records of individual investors. Controlling for various investor- and market-specific factors, we find a two-fold effect of weather. We first observe that investor sentiment, as measured by purchases relative to sales, is significantly higher on days with good weather. In addition, we find that retail investors generally trade more on bad weather days. This result is consistent with the notion that retail investors incur an opportunity cost for spending time trading on days with good weather.

Successful private equity managers have funds that are often oversubscribed and provide persistent abnormal returns. Why do not successful managers increase fund size or fees? We argue that managers want to attract high-quality entrepreneurs, while entrepreneurs want to match with high-ability managers. However, observing fund performance does not allow entrepreneurs to distinguish a manager’s ability from the quality of firms in the fund’s portfolio. As a consequence, a fund manager may devote unobserved effort to select firms, and keep fund size small to limit the cost of effort, hoping to manipulate entrepreneurs’ beliefs about his ability.

We propose the realized systemic risk beta as a measure of financial companies’ contribution to systemic risk, given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market and balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm’s Value-at-risk (VaR) on the system’s VaR. Statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the US financial system. Our approach can be used to monitor companies’ systemic importance, enabling transparent macroprudential supervision.

We investigate the separate and joint influences of social engagement measures on stock market participation and find that socially engaged individuals are more likely to participate. Consistent with Granovetter’s theory of social networks we find that a weak tie (measured by social group involvement) has a positive effect on stock market participation whereas a strong tie (measured by frequency of talking to neighbors) has no effect. More trusting individuals are more likely to participate in the stock market, as are those who identify with a political party. In contrast, the degree to which religion is important appears to have little impact.

China’s monetary stimulation after the global financial crisis rapidly boosted its GDP. We argue that its efficacy derives from state control over its banking and corporate sectors. Beijing ordered state-owned banks to lend and they lent. Beijing ordered centrally-controlled state-owned enterprises (SOEs) to invest and they invested. Our data show much of this investment was highly leveraged purchases of real estate and land prices rises occurred where these SOEs were active buyers. This episode mimics the credit channel for monetary policy, but actually entails internal transfers between arms of the government pressuring on real estate prices upwards.

We propose that an active takeover market provides incentives by offering acquisition opportunities to successful managers. This allows firms to reduce performance-based compensation and can rationalize loss-making acquisitions. When choosing its acquisition policy and the quality of its board, each firm ignores the adverse effect on other firms’ acquisition opportunities and takeover threat. As a result, the takeover market is not sufficiently liquid and too few takeovers occur. Furthermore, liquidity in the takeover and managerial labor markets are inversely related. When poaching managers becomes more profitable, firms invest more in board quality which in turn reduces the incidence of takeovers.

Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997–98 crisis suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups—facing severe financial and governance problems—could still borrow heavily from households by issuing bonds at prices implying very low expected default risk. The evidence suggests “too big to fail” beliefs were not eliminated by government promises because investors believed that this policy was not time consistent. Subsequent bailouts confirmed the market view that creditors would be protected.

We rely on a model with incomplete contracts and bargaining power to argue that trade credit (TC) can serve as a commitment device for making relationship-specific investments (RSIs). Unlike existing theories, we explain within a single theoretical framework why TC is affected by firms’ bargaining power and by the specialized nature of transacted goods. Using a large panel of publicly listed firms and innovation-based proxies for RSI, we find strong support for the model’s predictions: TC increases in upstream firm’s RSI and downstream firm’s market power. Endogeneity concerns are addressed by using the passage of innovation-increasing state laws to instrument for RSI and import penetration to instrument for bargaining power.

We exploit the US Survey of Consumer Finances from 1998 to 2010 to study households’ portfolio risk. We compare alternative measures of ex-ante risk, based on a financial portfolio including deposits, bonds, and stocks, or a broader portfolio also including real estate, business wealth, and related debt. The measures provide different rankings of portfolio risk, but they all show a skewed distribution with many households bearing limited risk. Large wealth holdings lead to more aggressive risk positions. Moreover, risk falls at the beginning of the sample period and rises at the end, together with the business cycle.

I derive and test multi-horizon implications of a consumption-based equilibrium model featuring fluctuating expected growth and volatility. My setup allows consumption dynamics to be estimated jointly with covariance risk prices in a single-stage generalized method of moment, and then inferences from asset pricing tests reflect uncertainty coming from factor estimation. I show that changes in consumption volatility are the key driver for explaining major asset pricing anomalies across risk horizons, while other factors play no or a secondary role. Value stocks and past long-term losers pay higher average returns mainly because they covary more negatively with these changes than what other stocks do.