Forthcoming Articles

Options Trading and Stock Price Informativeness

Jie Cao, Amit Goyal, Sai Ke, and Xintong Zhan

We document the causal effects of single-name options trading on the absolute level of information content of prices (stock price informativeness) by exploiting the Penny Pilot Program as an exogenous shock to options trading volume. We find that options trading increases underlying stock price informativeness and information acquisition by both option and stock investors, consistent with the framework of Goldstein and Yang (2015). The findings are driven by firms for which options are more important sources for information and firms with more efficiently priced options. Options market introduction in 25 other economies also leads to higher price informativeness.

Analyst Coverage and Corporate Environmental Policies

Chenxing Jing, Kevin Keasey, Ivan Lim, and Bin Xu

Exploiting two quasi-natural experiments, we find that firms increase emissions of toxic pollution following decreases in analyst coverage. The effects are stronger for firms with low initial analyst coverage, poor corporate governance and firms subject to less stringent monitoring by environmental regulators. Decreases in environmental-related questions raised in conference calls, an increased cost of monitoring to institutional shareholders, reductions in investment abatement technologies and the weakening of internal governance related to environmental performance are channels through which reduced analyst coverage contributes to increases in firm pollution. Our study highlights the monitoring role analysts play in shaping corporate environmental policies.

Holding Horizon: A New Measure of Active Investment Management

Chunhua Lan, Fabio Moneta, and Russell R. Wermers

This paper introduces a new holding horizon measure of active management and examines its relation to future risk-adjusted fund performance (alpha). Our measure reveals a wide cross-sectional dispersion in mutual fund investment horizons, and shows that long-horizon funds exhibit positive future long-term alphas by holding stocks with superior long-term fundamentals. Further, stocks largely held by long-horizon funds outperform stocks largely held by short-horizon funds by more than 3% annually, adjusted for risk, over the following five-year period. We also find a clientele effect: to reduce liquidity costs, long-horizon funds attract more long-term investors through share classes that carry load fees.

Informational Hold-Up by Venture Capital Syndicates

Suting Hong and Pierre Mella-Barral

We argue that VC syndicates associate VCs with uneven skill levels to lower their expected gains from threatening to stop financing: non-continued participation would send a milder negative signal to alternative financiers. Then (a) early round syndicates regularly associate VCs with different levels of experience and (b) follow-on syndicates often involve none of the early round VCs. Consistent with the theory, we find empirically that the heterogeneity of VC experience levels in a syndicate is negatively related to the extent to which firm founders are well connected and positively related to the likelihood of syndicate switching in a later round.

Financial Literacy and IPO Underpricing

Xiaoran (Jason) Jia, Kiridaran (Giri) Kanagaretnam, Chee Yeow Lim, and Gerald J Lobo

Using an international sample of IPO firms and two country-level measures of financial literacy, we find strong evidence that financial literacy is negatively associated with IPO underpricing. In cross-sectional analyses, we find that the effect of financial literacy in reducing IPO underpricing is more pronounced when the information environment is less transparent. Employing path analysis, we document that information friction, firm transparency, and stock market participation are mechanisms that mediate this relationship. Our study contributes to and extends the literature by providing strong evidence that citizens’ financial literacy has an important and consistent influence on IPO underpricing.

Does Main Street Benefit from What Benefits Wall Street?

Sean J. Flynn and Andra Ghent

We show that aggregate stock returns predict aggregate US employment, despite the industrial composition of publicly traded firms differing markedly from that of all firms, and the representativeness of public firms declining over time. We also show that appropriately reweighted stock returns predict industry and local labor market outcomes. We find the strongest evidence of an alignment of interests between shareholders and workers in the manufacturing sector, despite its declining labor share of output. Our findings suggest that, at quarterly frequencies, product demand shocks are more important drivers of industry- and city-level stock returns than technology shocks.

The Design of a Central Counterparty

John Kuong and Vincent Maurin

This paper analyzes the optimal allocation of losses via a Central Clearing Counterparty (CCP) in the presence of counterparty risk. A CCP can hedge this risk by mutualizing losses among its members. This protection, however, weakens members’ incentives to manage counterparty risk. Delegating members’ risk monitoring to the CCP alleviates this tension in large markets. To discipline the CCP at minimum cost, members offer the CCP a junior tranche and demand capital contribution. Our results endogenize key layers of the default waterfall and deliver novel predictions on its composition, collateral requirements, and CCP ownership structure.

Speculation with Information Disclosure

Paolo Pasquariello and Yifei Wang

Sophisticated investors frequently choose to publicly disclose private information, a phenomenon inconsistent with most theories of speculation. We propose and test a model to bridge this gap. We show that when a speculator cares about both short-term portfolio value and long-term profit, a disclosure mixing asset fundamentals and her holdings is optimal by inducing competitive dealership to revise prices toward those holdings while alleviating adverse selection. We find that when mutual fund managers have stronger short-term incentives, the frequency of strategic non-anonymous disclosures about their stocks by market-worthy newspaper articles increases and those stocks’ liquidity improves, consistent with our model.

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