Knowledge that Transforms

[This article studies differences in the information content of 870,000 news announcements in 56 markets around the world. In most developed markets, a firm's stock price moves much more on days with public news about the firm. In contrast, in many emerging markets volatility is similar on news and non-news days. We examine several hypotheses for our findings. Cross-country differences in stock price reactions are best explained by insider trading, followed by differences in the quality of the news dissemination mechanism. Our findings are useful for quantifying the extent of insider trading and how the financial media affects international markets.]

[This article adopts a definition of property rights from legal scholarship: A property right (in contrast to a contractual right) is enforceable, not only against the parties to a contract, but also against third parties outside the contract. In a financial contracting setting, we ask: When should the law enforce a lender's contractual protections as property rights, given that these rights may be hidden and costly for other lenders to discover? Our model explains why the law limits the creation and enforceability of property rights, and develops principles of optimal enforceability. These principles are often reflected in the law.]

[We posit that consumer lenders shroud interest rates and market "low monthly payments" to price discriminate on "fuzzy math" or "payment/interest bias": consumers' pervasive tendency to underestimate borrowing costs when an interest rate is not disclosed. We test whether mandated disclosure changes lenders' ability to price discriminate using withinhousehold interactions between payment/interest bias and policy-induced variation in the strength of Truth-in-Lending Act (TILA) enforcement across lenders and time. Weak TILA enforcement substantially widens the gap between rates paid by more-biased and lessbiased borrowers. TILA compliance costs appear to increase interest rates overall, making the net effect on interest rates ambiguous.]

[We propose a new, valuation-based measure of world equity market segmentation. While we observe decreased levels of segmentation in many countries, the level of segmentation remains significant in emerging markets. We characterize the factors that account for variation in market segmentation both through time as well as across countries. Both a country's regulation with respect to foreign capital flows and certain nonregulatory factors are important. In particular, we identify a country's political risk profile and its stock market development as two additional local segmentation factors as well as the U.S. corporate credit spread as a global segmentation factor.]

[We document a significant investment bank fixed effect in the announcement returns of M&A deals. The interquartile range of bank fixed effects is 1.26%, compared with a full-sample average return of 0.72%. The results remain significant after controlling for the component of returns attributable to the acquirer. Our findings suggest that investment banks matter for M&A outcomes, and contrast earlier studies that show no positive link between various measures of advisor quality and M&A returns. Differences in average returns across banks are also persistent over time and predictable from prior performance. Clients do not chase past returns, which may explain why persistence exists in M&A performance while it is absent in mutual funds.]

[This article tests whether stock market investors appropriately distinguish between new and old information about firms. I define the staleness of a news story as its textual similarity to the previous ten stories about the same firm. I find that firms' stock returns respond less to stale news. Even so, a firm's return on the day of stale news negatively predicts its return in the following week. Individual investors trade more aggressively on news when news is stale. The subsequent return reversal is significantly larger in stocks with above-average individual investor trading activity. These results are consistent with the idea that individual investors overreact to stale information, leading to temporary movements in firms' stock prices.]

[We study a competitive model in which managers differ in ability and choose unobservable effort. Each firm chooses its size, how able a manager is to hire, and managerial compensation. The model can be considered an amalgam of agency and Superstars, where optimizing incentives enhances the firm's ability to provide a talented manager with greater resources. The model delivers many testable implications. Preliminary results show that the model is useful for understanding interesting compensation trends, for example, why CEO pay has recently become more closely associated with firm size. Allowing for firm productivity differences generally strengthens our results.]

[This article endogenizes information acquisition and portfolio delegation in a one-period strategic trading model. We find that, when the informed portfolio manager is relatively risk tolerant (averse), price informativeness increases (decreases) with the amount of noise trading. When noise trading is endogenized, the linear equilibrium in the traditional literature breaks down under a wide range of parameter values. In contrast, a linear equilibrium always exists in our model. In a conventional portfolio delegation model under a competitive partial equilibrium, the manager's effort of acquiring information is independent of a linear incentive contract. In our strategic trading model, however, a higher-powered linear contract induces the manager to exert more effort for information acquisition.]

[We document the cross-sectional properties of corporate dividend-smoothing policies and relate them to extant theories. We find that younger, smaller firms, firms with low dividend yields and more volatile earnings and returns, and firms with fewer and more disperse analyst forecasts smooth less. Firms that are cash cows, with low growth prospects, weaker governance, and greater institutional holdings, smooth more. We also document that dividend smoothing has steadily increased over the past 80 years, even before firms began using share repurchases in the mid-1980s. Taken together, our results suggest that dividend smoothing is most common among firms that are not financially constrained, face low levels of asymmetric information, and are most susceptible to agency conflicts. These findings provide challenges and guidance for the developing theoretical literature.]

[We introduce a new class of parametric models applicable to a mixture of high and low frequency returns and revisit the concept of news impact curves introduced by Engle and Ng (1993). Overall, we find that moderately good (intra-daily) news reduces volatility (the next day), while both very good news (unusual high intra-daily positive returns) and bad news (negative returns) increase volatility, with the latter having a more severe impact. The asymmetries disappear over longer horizons. Models featuring asymmetries dominate in terms of out-of-sample forecasting performance, especially during the 2007-2008 financial crisis.]