I describe household behavior in boom and bust economic cycles with a particular focus on the recent financial crisis. The behaviors are motivated by cognitive limitations and psychological bias. In boom times, households’ extrapolation bias and groupthink lead to chasing and extending asset bubbles (like tech stocks and real estate). Increasing use of debt spurs the economy and eventually overburdens households. In bust times, the biases and fear lead to selling previously popular assets at low prices. Households generally respond to bust times by spending less, repaying debt and saving more, which drags on an already slow economy. In addition, households influence businesses and governments into actions during the cycle. In the recent boom, predatory lenders preyed on cognitive limitations and biases of subprime borrowers to sell them high cost mortgages that they would not be able to repay. Another contributing factor is that during boom times, household attention is not focused on financial regulation. This is when business influences the political process and laws are enacted to loosen market regulation. These changes may extend the boom period into bubble territory. During bust times, public outcry influences politicians to tighten business regulation, likely inhibiting the economic rebound. Thus, household behavior plays an important role in economic boom/bust cycles.

We document strong positive correlation between changes in institutional ownership and returns measured over the same period. The result suggests that either institutional investors positive‐feedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. We find evidence that both factors play a role in explaining the relation. We find no evidence, however, of return mean‐reversion in the year following large changes in institutional ownership—stocks institutional investors purchase subsequently outperform those they sell. Moreover, institutional herding is positively correlated with lag returns and appears to be related to stock return momentum.

This study investigates the trading behavior of institutional and individual investors around both firm-specific news releases in the Wall Street Journal and macro-economic announcements. For the firm-specific news releases we find that investors conduct a high degree of trading around news releases, especially earnings and dividend news. Institutions buy and sell on both good and bad news, while individual investors only trade on good news. The length of the news article (visibility) is also an important attribute to motivate individual investor trading. Lastly, both institutions and individuals buy large firms after good economic news and sell large firms after bad economic news. The trading of small firms does not appear to be motivated by macro-news.

As a part of the ongoing liberalization of the marketplace, Chinese regulators adopted the guideline called “Regulation of Equity Incentive Plans (trial)” to allow firms to provide employee incentives through employee stock option plans. Firms began initiating the plans in 2006. We investigate the impact of these plans on firm performance by comparing option-award firms with similar non-award matching firms. The change in ROE for the option-award firms is significantly higher than the matching firms. This is primarily due to their performance holding up better during the global financial crisis while the matching firms’ performance deteriorates. The stock price of these firms shows a positive reaction to the announcement, but no long-term abnormal returns. The better ROE performance for option-award firms is strong for subsets of the sample that are likely to benefit more from incentivized employees; specifically, privately owned firms, firms with higher board independence, and smaller firms. After various robustness tests, we conclude that the higher performance comes from the employee incentives, rather than earnings manipulation, a replacement of cash compensation, a binding of employees to executives, or gaming vesting periods.

When determining a stock to buy, Strahilevitz et al. (2011) demonstrate that individual investors often repurchase a stock previously traded for a profit as a learning process. When evaluating a decision, people use the most available information that comes to mind. We posit that the most recently sold stocks are the most salient. Our analysis reveals that the presence of another more recently sold stock decreases a household’s propensity to repurchase a different stock by 23%. This recency effect dominates the impact of prior profitability on the repurchasing decision. The repurchase activity of investors appears to be sub-optimal, partially due to commission costs and under-diversification of portfolios, which is magnified for households repurchasing at higher frequencies. More sophisticated investors demonstrate less of this behavior.

The typical new start-up firm acquires external financing in stages through its development. Researchers have frequently examined the later stages of financing; however, they have rarely analyzed the early stages of financing. This study examines the determinants of the initial start-up financing of entrepreneurial firms in 27 countries. There are information asymmetries and moral hazard problems inherent in the funding of an initial start-up firm. Empirical results show that institutional investors rely on the experience of entrepreneurs in managing start-ups and the quality of investor protection to reduce moral hazard. On the other hand, informal investors are also common in initial start-up funding. They tend to be attracted to the type of products in the new firm. In comparison, informal investors are likely to have a social relationship with the entrepreneur, and thus have information about that person’s skill and character, which renders entrepreneurial experience less important.

We examine the operating performance of Thai firms after they go public. Overall, we find that their performance declines. We then explore the relationship between managerial ownership and the change in firm performance. We find that firms with ‘low’ and ‘high’ levels of managerial ownership experience positive relationships between managerial ownership and the change in performance (alignment-of-interest hypothesis), while firms with ‘intermediate’ levels of managerial ownership exhibit a negative relationship between managerial ownership and the change in performance (entrenchment hypothesis). Examining the operating performance of IPO firms from an emerging market and finding a curvilinear relationship between managerial ownership and the post-IPO change in performance represents two significant contributions to the IPO literature.

Consistent with the predictions of Brennan and Thakor's (1990) model of shareholder preferences, we find that, on average, institutional shareholders are net sellers during share repurchases. After controlling for liquidity provision and characteristics investing, we find that a one standard deviation increase in share repurchases during a given quarter is associated with a 0.11 standard deviation decrease in institutional investor demand. We estimate that 37% of the inverse relation is attributed to institutional investors executing liquidity provision strategies, 8% is explained by institutions reacting to the investment characteristics signaled by a repurchasing firm. We attribute the majority, 55%, to the information asymmetry between institutions and individual investors. This work is one of the first to exploit the SEC mandate requiring firms to report the actual number of shares they repurchase each quarter, beginning in 2004. Using actual number of shares repurchased, we find evidence of institutional investors increasing their selling as firms increase their repurchasing. This finding is robust to models of endogeneity and autocorrelation in share repurchases and institutional investor trading.

We examine the relation between minority shareholder protection laws, ownership concentration, and board independence. Minority shareholder rights is a country-level governance variable. Ownership structure and board composition represent firm-level governance variables. Prior research hypothesizes and documents a negative relation between countries' minority shareholder rights quality and firms' ownership concentration. We introduce the hypothesis that shareholder protection rights and firms' board independence are positively related. When a country's minority shareholder rights are strong, then minority shareholders should have the legal power to affect board composition. Using a sample of large firms from 14 European countries, we test both hypotheses and find that countries with stronger shareholder protection rights have firms with lower ownership concentrations and with more independent directors, consistent with both hypotheses. We also find evidence that ownership concentration and board independence are negatively related.

We document strong positive correlation between changes in institutional ownership and returns measured over the same period. The result suggests that either institutional investors positive‐feedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. We find evidence that both factors play a role in explaining the relation. We find no evidence, however, of return mean‐reversion in the year following large changes in institutional ownership—stocks institutional investors purchase subsequently outperform those they sell. Moreover, institutional herding is positively correlated with lag returns and appears to be related to stock return momentum.