Knowledge that Transforms

This paper examines the contribution of out-of-town second-house buyers to mispricing in the housing market. We show that demand from out-of-town second-house buyers during the mid 2000s predicted not only house-price appreciation rates but also implied-to-actual-rent-ratio appreciation rates, a proxy for mispricing. We then apply a novel identification strategy to address the issue of reverse causality. We give supporting evidence that out-of-town second-house buyers behaved like misinformed speculators, earning lower capital gains (misinformed) and consuming smaller dividends (speculators).

We examine whether the stock market considers corporate lobbying to be value enhancing, using an event that potentially limited the ability of firms to lobby but was exogenous to their characteristics and prior lobbying decisions. The results show that this exogenous shock negatively affects the value of firms that lobby. In particular, we estimate that a firm that spends $100,000 more on lobbying in the 3 years before the shock (where sample average lobbying expenses are about $4 million), experiences a loss of about $1.2 million in shareholder value on average. We also examine the channels through which lobbying may create value for firms.

In the literature, there is no consensus on a common approach to measure bond liquidity. This paper is the first to comprehensively compare all commonly employed liquidity measures based on intraday and daily data for the U.S. corporate bond market. We find that high-frequency measures based on intraday data are very strongly correlated, implying that previous results should be robust regarding the chosen measure. Most low-frequency proxies based on daily data generally also measure transaction costs well. However, three proxies clearly take the lead: Corwin and Schultz's (2012) high-low spread estimator, Roll's (1984) measure, and Hasbrouck's (2009) Gibbs measure.

This paper investigates financial attention using novel panel data on daily investor online account logins. We find support for selective attention to portfolio information. Account logins fall by 9.5% after market declines. Investors also pay less attention when the VIX volatility index is high. The level of attention and the attention/return correlation are strongly related to investor demographics (gender, age) and financial position (wealth, holdings). Using a new statistical decomposition, we show how aggregate and individual household trading are related to investor attention.

Proxy advisory firms have become important players in corporate governance, but the extent of their influence over shareholder votes is debated. We estimate the effect of Institutional Shareholder Services (ISS) recommendations on voting outcomes by exploiting exogenous variation in ISS recommendations generated by a cutoff rule in ISS voting guidelines. Using a regression discontinuity design, we find that from 2010 to 2011, a negative ISS recommendation on a say-on-pay proposal leads to a 25 percentage point reduction in say-on-pay voting support, suggesting a strong influence over shareholder votes. We also use our setting to examine the informational role of ISS recommendations. Received April 13, 2015; editorial decision June 13, 2016 by Editor Itay Goldstein.

We quantify the real effects of the bank-lending channel exploiting the dramatic liquidity drought in interbank markets that followed the 2007 financial crisis as a source of variation in credit supply. Using a large sample of matched firm–bank data from Italy, we find had the interbank market not collapsed, investment expenditure would have been more than 20% higher and would have increased by around 30 cents per additional euro of available credit at the average firm. We also find that credit shocks affect the firm's value added, employment and input purchases, and propagate through firms' trade credit chains.

Social interaction contributes to some traders’ disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader’s disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.

We test the hypothesis that, when thinking about allocating money to a stock, investors mentally represent the stock by the distribution of its past returns and then evaluate this distribution in the way described by prospect theory. In a simple model of asset prices in which some investors think in this way, a stock whose past return distribution has a high (low) prospect theory value earns a low (high) subsequent return, on average. We find empirical support for this prediction in the cross-section of stock returns in the U.S. market, and also in a majority of forty-six other national stock markets.

We examine the capital-market effects of changes in securities regulation in the European Union aimed at reducing market abuse and increasing transparency. To estimate causal effects for the population of E.U. firms, we exploit that for plausibly exogenous reasons, such as national legislative procedures, E.U. countries adopted these directives at different times. We find significant increases in market liquidity, but the effects are stronger in countries with stricter implementation and traditionally more stringent securities regulation. The findings suggest that countries with initially weaker regulation do not catch up with stronger countries, and that countries diverge more upon harmonizing regulation. (

We show that higher institutional ownership causes firms to pay more dividends. Our identification relies on a discontinuity in ownership around Russell index thresholds. Our estimates indicate that a one-percentage-point increase in institutional ownership causes a $7 million (8%) increase in dividends. We also find differences in shareholder proposals and voting patterns that suggest that even nonactivist institutions play an important role in monitoring firm behavior. The effect of institutional ownership on dividends is stronger for firms with higher expected agency costs.