In a model where investors disagree about the fundamentals of two stocks, the state-price density depends on investor disagreements for both stocks, especially the larger stock. This implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks owned by these investors. The pricing effects of investor disagreements crucially depend on the average belief biases. Empirical findings support the novel model prediction of a disagreement spillover effect and help reconcile some mixed evidence in the literature.

A major threat to the development of financial markets in emerging markets is “tunneling.” In China, this took on the form of controlling shareholders diverting assets from listed firms or coercing firms to serve as guarantors on questionable loans. A new set of rules enacted in 2005 prohibited asset diversion for “non-operational” purposes. Firms complying with these rules have experienced a reduction in related party transactions, an increase in investment, and better performance. In contrast, another set of contemporary rules, which aimed to standardize the practice of firms providing loan guarantees, has had very little impact. We attribute the contrasting design, implementation, and effectiveness of these two sets of rules to the difference in enforcement costs of the two types of tunneling activities. Relative to loan guarantees, it is much easier for a third party to determine (ex ante) whether a particular form of diversion destroys firm value, and to verify (ex post) that the losses to the firm resulted from the diversion. Our results highlight the importance of enforceability—laws and regulations that can be enforced at lower costs are more likely to succeed, especially in countries with underdeveloped formal institutions.

We examine the cross-sectional predictability of corporate bond returns using a novel international dataset and a set of machine learning techniques. We find strong predictability in both U.S. and non-U.S. markets, with differing predictive factors. Bonds in developed markets show greater integration with the U.S. market and stronger ties to equity markets. Predictive performance of machine learning models varies over time and is greater before the onset of the COVID-19 pandemic and during periods of deteriorating business conditions, reduced market liquidity, elevated investor sentiment, and heightened risk aversion. The results offer insights into bond pricing and global diversification opportunities.

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.

Financial distress is a prevalent issue among the youth. An influential stream of literature has argued that religion wields significant influence over human life. Using a representative sample of U.S. young people, we explore whether religiosity matters for financial distress. To deal with endogeneity issue, we exploit arguably exogeneous within-school variation in adolescents’ peers. By instrumenting an adolescent's own religiosity with the religiosity of their school peer group, we find that higher levels of religiosity causally and significantly reduce the likelihood of financial distress at young adulthood. Our results withstand a variety of robustness checks. To shed light on the mechanisms, we explore the impact of religiosity on an individual's sociability and various psychological attributes. We find that more religious individuals hold higher levels of self-control, a crucial attribute that aids in averting financial distress. Our study contributes to the literature by providing rigorous causal evidence that identifies religiosity as a meaningful predictor of reduced financial distress among young adults.