This article studies the pruned state-space system for higher-order perturbation approximations to dynamic stochastic general equilibrium (DSGE) models. We show the stability of the pruned approximation up to third order and provide closed-form expressions for first and second unconditional moments and impulse response functions. Our results introduce generalized method of moments (GMM) estimation and impulse-response matching for DSGE models approximated up to third order and provide a foundation for indirect inference and simulated method of moments (SMM). As an application,we consider a New Keynesian model with Epstein–Zin preferences and two novel feedback effects from long-term bonds to the real economy, allowing us to match the level and variability of the 10-year term premium in the U.S. with a low relative risk aversion of 5.

We examine how CEOs can facilitate the development of investor trust that helps mitigate the effects of negative information. Results from an experiment show that investors trust the CEO more and are more willing to invest in the firm when the CEO communicates firm news followed by a negative earnings surprise through a personal Twitter account than when the news and surprise comes from the CEO via a website or from the firm's Investor Relations Twitter account or website. A follow‐up experiment shows that repeating the negative news does not incrementally affect investors who received the news from the CEO's Twitter account, but does further negatively impact investors who received the news via other disclosure mediums, especially those who received the news via the Investor Relations Twitter account. Our results have implications for firms and executives considering the costs and benefits of communicating with investors via Twitter.

To assess stock market informational efficiency with minimal data snooping, we take the view of a statistician with little knowledge of finance. The statistician uses techniques such as least squares to estimate peer-implied fair values from the market values of replicating portfolios with the same accounting statements as the company being valued. Divergence of a company's peer-implied value estimate from its market value represents mispricing, motivating a convergence trade that earns risk-adjusted returns of up to 10% per year and is economically significant for both large and small cap firms. The rate of convergence decays to zero over the subsequent 34 months.

At the settlement time of the VIX Volatility Index, volume spikes on S&P 500 Index (SPX) options, but only in out-of-the-money options used to calculate the VIX, and more so for options with a higher and discontinuous influence on VIX. We investigate alternative explanations of hedging and coordinated liquidity trading. Tests including those utilizing differences in put and call options, open interest around the settlement, and a similar volatility contract with an entirely different settlement procedure in Europe are inconsistent with these explanations but consistent with market manipulation. Large transient deviations in prices demonstrate the importance of settlement design. Received November 28, 2015; editorial decision June 19, 2017 by Editor Robin Greenwood.

This paper analyzes "attribute-based regulations," in which regulatory compliance depends upon some secondary attribute that is not the intended target of the regulation. For example, in many countries, fuel-economy standards mandate that vehicles have a certain fuel economy, but heavier or larger vehicles are allowed to meet a lower standard. Such policies create perverse incentives to distort the attribute upon which compliance depends. We develop a theoretical framework to predict how actors will respond to attribute-based regulations and to characterize the welfare implications of these responses. To test our theoretical predictions, we exploit quasi-experimental variation in Japanese fuel economy regulations, under which fuel-economy targets are downward-sloping step functions of vehicle weight. Our bunching analysis reveals large distortions to vehicle weight induced by the policy. We then leverage panel data on vehicle redesigns to empirically investigate the welfare implications of attribute-basing, including both potential benefits and likely costs.

From 1973 to 2014, the common stock of U.S. banks with loan growth in the top quartile of banks over a three-year period significantly underperformed the common stock of banks with loan growth in the bottom quartile over the next three years. After the period of high growth, these banks have a lower return on assets and increase their loan loss reserves. The poorer performance of fast-growing banks is not explained by merger activity. The evidence is consistent with banks, analysts, and investors being overoptimistic about the risk of loans extended during bank-level periods of high loan growth. Received September 14, 2016; editorial decision May 28, 2017 by Editor Itay Goldstein.

A contrast effect occurs when the value of a previously observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday's earnings surprise was bad and less impressive if yesterday's surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by an alternative explanation involving information transmission from previous earnings announcements.

A contrast effect occurs when the value of a previously observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday's earnings surprise was bad and less impressive if yesterday's surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by an alternative explanation involving information transmission from previous earnings announcements.

We survey the growing academic literature using Abel Noser data, including 55 publications thus far. We analyze publication patterns to explore how the availability of a specialized microstructure dataset propagates across different areas within finance and into other disciplines such as accounting. Of note, we identify corporate finance and accounting as the most under-researched areas that offer promising opportunities for future academic research using the data. To provide guidance for researchers interested in using Abel Noser data, we analyze institutional trading using transaction-level data spanning more than 12 years and covering 233 million transactions with $37 trillion traded. We provide background information on the origin and history of the data, offer suggestions for cleaning and using the data, and discuss (dis)advantages of Abel Noser compared to other data sources for institutional trading. We also document two simple facts: 1) institutional trade sizes decline dramatically over time, rendering trade size-based inferences of institutional trades problematic; 2) we estimate that Abel Noser data cover 12% of CRSP volume over our sample period and 15% for 1999–2005, significantly higher than the estimate in Puckett and Yan (2011) for 1999–2005: 8%, a widely quoted number in the literature. This background should prove useful for researchers seeking to address a number of as yet unexplored issues, especially in corporate finance and accounting research.

This paper examines if, when, and to what extent multinational tax incentives incrementally explain where firms move offshored U.S. jobs. Using jobs data from a Department of Labor program called Trade Adjustment Assistance, I find a significant association between tax incentives and both the likelihood that a foreign country hosts offshored U.S. jobs and the number of U.S. jobs it hosts. This association is stronger when managers have discretion to coordinate cross-border transactions internally and when they do not face political costs imposed by labor unions. Following instances of offshoring, I find some evidence that offshoring firms have lower effective tax rates, but these reductions are concentrated within larger layoffs in which jobs are sent to low-tax countries. These findings are relevant to understanding the real effects and welfare consequences of incentives created by current U.S. tax policy.