Knowledge that Transforms

Closing auctions account for about 10% of daily trading volume and offer a potentially attractive alternative to trading in the continuous market. We find that the price impact is lower in closing auctions than in the continuous market for all stocks except Nasdaq microcaps. Opening auctions are illiquid. We compute trading costs for anomalies based strategies by strategically placing orders in the lower cost mechanism. The annualized trading costs for long/short portfolios based on financial ratios such as profitability and investment range from 17 to 41 basis points (bps). Excluding microcaps, these costs fall to 9–21 bps in closing auctions.

Housing and human capital represent two major forms of household wealth. This article investigates the potential for housing speculation to crowd out household investment in children’s education, an endeavor that only pays off in the long run. To address endogeneity concerns, we exploit the unintended spillover effect of staggered house purchase restrictions (HPR) in China. Using a difference-in-differences approach, we find that HPR reduce educational investment of households in nearby unregulated cities. We also provide evidence consistent with a housing speculation channel. These findings shed new light on the socioeconomic consequences of housing market booms.

We argue that firms’ ability to disinvest real assets helps rationalize the negative distress premiums in stocks, bonds, and, as we show, loans and firm assets. Using a real options model in which shareholders and debtholders share disinvestment proceeds, the model suggests that the stock (debt) distress premium becomes more negative with the proceeds paid out to that class, and that both premiums can be negative when debtholders receive most of the proceeds. Using hard-asset disinvestment-ability proxies, the stock (bond or loan) distress premium becomes less (more) negative with those proxies, possibly suggesting that shareholders benefit more strongly from nonsecured-asset disinvestments.

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Expected returns on market volatility, which can be obtained from VIX futures prices in closed form using standard models, positively predict subsequent realized volatility returns. Volatility returns are negative on average. Following increases in volatility, expected volatility returns and subsequent realized volatility returns become more negative. Because realized volatility returns are negatively correlated with index returns, expected volatility returns also negatively predict S&P 500 index returns, but these results are less significant. The results are robust to a wide range of variations in the empirical setup and to small-sample biases.

We study the classical relationship between a firm’s investment and q , for which an unobserved persistent shock is an important factor in the investment decision. In our setting, besides the potential measurement problem of q , controlling for the unobserved shock becomes a new challenge. We develop an estimation method that addresses both econometric issues given timing and information set assumptions. Using 16,256 unique public firms in the United States from 1975 to 2021, we find that q remains a significant factor of investment even after controlling for the unobserved shock and measurement error.

Under Title II of the Jumpstart Our Business Startups Act, firms can sell private placement securities to the public via general solicitation (GS) or privately (non-GS). We find that equity offerings under GS tend to be riskier than under non-GS. After accounting for selection, GS issuers are less likely to succeed in i) raising capital, ii) getting venture capital (VC) funding, and iii) exiting via IPO or mergers and acquisitions, and incur substantial brokerage costs for advertising and verifying investor accreditation. However, GS appears to help new entrants and offerings that use registered brokers. The success of Form D financing improves future VC financing and exit outcomes.

I ask whether hedgers who speculate should be regulated differently from other speculators in a model where information acquisition is endogenous, and information has real effects. Hedging benefits and feedback effects generate strategic complementarities between market-maker, firm manager, and trader, which causes multiple equilibria. Gains from trade are lower when hedgers acquire information, while speculators may produce less information than socially desirable. A “Volcker rule” separating hedging and speculative activities may help select the higher welfare equilibrium. When too little information is produced, contracts whereby a firm subsidizes losses of designated market-makers (DMM) to make prices more informative increase welfare.

Institutional investors conduct more governance research and are less likely to follow proxy advisor vote recommendations when a company’s bonds comprise a larger share of their assets. These findings are driven by bond holdings, shareholder proposals, and companies where fixed-income managers are more likely to be attentive and share an interest with equity investors in improving governance. The findings do not concentrate on companies or shareholder proposals where creditor–shareholder conflicts are likely. Overall, the findings suggest that corporate bond holdings influence how actively institutions monitor their equity positions and contribute to institutions’ overall incentive to be engaged stewards.

We introduce the implied value premium ( IVP ), the difference between the implied costs of capital of value and growth stocks, to predict time variation in the ex post value premium. During 1977–2023, IVP is the strongest predictor of the ex post value premium. It also predicts the investment premium, consistent with the Investment CAPM. However, IVP ’s ability to predict the difference in cumulative abnormal returns around quarterly earnings announcements of value and growth stocks suggests that mispricing may also play a role. Overall, our results suggest that recent value underperformance reflects cyclical variation rather than a permanent shift.