Abstract We study how firms build relations with local governments in emerging markets without established rules of political lobbying. We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially privately owned enterprises, POEs hereafter) headquartered in that city significantly increase their “perk spending,” for example, expenses for travel and entertainment among others. Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. In addition, we find that local political turnover in a city tends to be followed by changes of the Chairmen or the CEOs of state-owned enterprises that are controlled by the local government. We also discuss and rule out several alternative explanations for the above findings.

We analyze two insider-trading regulations recently introduced by the Securities and Exchange Commission: mandatory disclosure and “cooling-off period”. The former requires insiders disclose trading plans at adoption, while the latter mandates a delay period before trading. These policies affect investors’ trading profits, risk sharing, and hence their welfare. If the insider has sufficiently large hedging needs, in contrast to the conventional wisdom from “sunshine trading”, disclosure reduces the welfare of all investors. In our calibration, a longer cooling-off period benefits speculators, and its implications for the insider and hedgers depend on whether the disclosure policy is already in place.

The sovereign CDS market has developed rapidly for two decades and currently has a gross notional amount of more than a trillion dollars. We document a strong momentum effect in this market, which cannot be explained by a large set of risk factors. These momentum returns are positively skewed and higher during recessions. Consistent with the interpretation that this momentum effect is due to investors’ initial underreaction to sovereign credit information followed by corrections, our evidence shows that the momentum returns tend to be higher during the months surrounding announcements of credit rating or outlook changes of the underlying countries.

We use the advent of new credit default swap (CDS) trading conventions in April 2009—the CDS Big Bang—to study how a shock to funding liquidity impacts market liquidity. After the Big Bang, traders are required to pay upfront fees to execute CDS transactions, with the size of the fees depending on the level of CDS spreads. While CDS bid-ask spreads decline in aggregate after the Big Bang, they do so less for contracts that require larger fees. Furthermore, the funding effect is stronger for smaller and riskier firms and for noncentrally cleared contracts. The effect also becomes stronger after Deutsche Bank's exit.

Abstract We analyze a model in which an anomaly is unknown to arbitrageurs until its discovery, and test the model implications on both asset prices and arbitrageurs’ trading activities. Using data on 99 anomalies documented in the existing literature, we find that the discovery of an anomaly reduces the correlation between the returns of its decile-1 and decile-10 portfolios. This discovery effect is stronger if the aggregate wealth of hedge funds is more volatile. Finally, hedge funds increase (reverse) their positions in exploiting anomalies when their aggregate wealth increases (decreases), further suggesting that these discovery effects operate through arbitrage trading.

Abstract We survey a large, representative sample of retail investors in China to elicit their memories of stock market investments and their return expectations. We merge these survey data with administrative transaction data to test a model in which investors selectively recall past experiences to form their beliefs. Our analysis uncovers new facts about investor memory and highlights similarity-based recall as a key mechanism of belief formation in financial markets. A rising market prompts investors to recall their past experiences more positively, leading to more optimistic forecasts of future returns. Recalled experiences can explain cross-investor variation in return expectations and, in our setting, dominate actual experiences in their explanatory power. In the transaction data, we confirm that recalled experiences are reflected in investors’ trading decisions through a belief channel.

Abstract Using data from a major online peer-to-peer lending platform, we document that, due to time pressure, investors appear to focus on interest rates and only partially account for credit ratings in their decisions. The effect is stronger for mobile-based investors than for PC-based ones. Our evidence suggests that this variation is caused by the difference in information content on the interfaces rather than differences in the devices’ physical attributes per se. Investors improve their decisions by slowing down and paying more attention to credit ratings after experiencing a loan default firsthand, but not after observing others experiencing defaults.