We explain why the market underreacts to the certified extreme financial distress signal conveyed by the auditor's going-concern (GC) opinion. We conjecture that GC stocks attract retail investors with gambling proclivities. Splitting our GC sample into lottery-like and non-lottery-like firms, we find that the anomaly is concentrated in lottery-like firms, which underperform by-17 % to-32 % over the following year. A range of analyses confirm retail investors with greater propensity to gamble are more likely to trade lottery-like GC stocks. We conclude that retail investor gambling-motivated trading behavior is a key driver of the going-concern market paradox.

We study the aggregate impact of information spillovers emerging from industry star firms. Changes in stars' relative earnings growth predict future earnings growth, consensus earnings surprises, and job postings of same-industry nonstar firms. Star-firm performance also predicts industry-level GDP and employment growth. Price markup and innovation spillovers are potential channels underlying these patterns. Our results further show that this performance predictability is not fully incorporated into nonstars' stock prices. A long-short portfolio based on star firms' earnings growth earns an annualized 6-factor alpha of 8.7%. Together, our findings provide consistent evidence of the economic importance of star firms.

This paper investigates in-group bias in financial markets. Specifically, we argue that equity analysts may have less favorable opinions about firms that are not headed by CEOs of their own “group”. We define groups based on gender, ethnicity and political attitudes. Examining analysts’ earnings forecasts, we find that male analysts have lower assessments of firms headed by female CEOs than of firms headed by male CEOs. Results are very similar if in-groups are defined based on ethnicity or political attitudes: Earnings forecasts of domestic analysts are lower for firms headed by foreign CEOs and earnings forecasts of Republican analysts are lower for firms headed by Democrat CEOs. As a result, earnings surprises of firms headed by female, foreign, or Democrat CEOs are systematically upward biased. Overall, our results provide robust evidence for in-group bias in financial markets.

We examine the relation between temperature changes and firm performance using a novel time-varying measure of firm-level temperature sensitivity. We find that firms with higher temperature sensitivity have lower future profitability and riskier corporate policies. These firms are also overpriced and earn lower average future returns as market participants are slow to correct the mispricing. Nonlocal institutional investors allocate higher portfolio weights to firms with high temperature sensitivity, and sell-side equity analyst forecasts are less accurate for these firms. Together, these results suggest that financial markets underreact to information about firm-level temperature sensitivity, and this generates predictable patterns in returns. A trading strategy that exploits this mispricing generates an annualized risk-adjusted return of more than 4% during the 1968–2020 period. This paper was accepted by Bo Becker, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00972 .

This study examines whether international tourism affects financial market investments. Using over two decades of data for more than 30 countries, we find that recreational travel between countries is associated with higher levels of foreign equity investments and reduced home bias. This evidence of tourism-induced foreign investment is consistent with the familiarity hypothesis and is unlikely to reflect superior information. We alleviate potential endogeneity concerns using several econometric techniques, including instrumental variables, quasi-natural experiments, and multiple placebo tests. Collectively, these results suggest that tourism has positive externalities in financial markets.

A significant portion of U.S. households enters and exits investment accounts. Empirically, income and wealth changes are related to these transitions, with income changes not affecting the retired. A life cycle model with participation costs cannot match the observed ownership dynamics, but an extension with stock market crash better fits the average participation rate and ownership transitions of the middle-aged and retired. This extended model does not match the ownership dynamics of the young, which are better captured by a model with elevated income risk. Overall, these findings indicate that ownership transitions respond to wealth shocks across the life cycle, both in our model and the data.

This study demonstrates that skewness preference of investors is an important driver of various market anomalies. Using a combined measure of mispricing based on 11 prominent anomaly strategies, we show that return predictability associated with the mispricing component of market anomalies is stronger among firms with higher idiosyncratic skewness. The predictability differences are driven by the higher underperformance of high-skewness firms in short anomaly portfolios. Skewness does not affect the performance of long anomaly portfolios. Portfolio holdings data from a retail brokerage firm show that investors with stronger skewness preferences assign relatively larger weights to stocks in short anomaly portfolios. This paper was accepted by Karl Diether, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4898 .

We study the impact of monetary policy changes on portfolio decisions of U.S. households. Contrary to the predictions of canonical portfolio choice models, interest rate increases are related to increased equity ownership and larger wealth allocations to risky assets. Inflation hedging is a likely explanation for these findings. Interest rates have a stronger impact on the equity exposure of households that experience higher inflation, especially those with greater inflation awareness and potentially stronger hedging motives. Using household portfolios at a large discount brokerage house, we provide direct evidence that investors with greater inflation sensitivity overweight stocks with high hedging potential. This paper was accepted by Camelia Kuhnen, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.02197 .

This paper examines whether perceptions of discrimination affect the economic expectations of U.S. households. We focus on two forms of expectations that play a central role in economic and financial decisions of households: labor income and inflation. Using experimental data, we demonstrate that discrimination generates greater dispersion in household forecasts. It increases subjective expectations of income uncertainty by 8% and inflation uncertainty by 5%. The impact of discrimination is concentrated among racial/ethnic minorities, inducing 12%–16% greater variation in their income uncertainty expectations and 10%–12% greater variation in their inflation uncertainty expectations. Both psychological and emotional factors appear to influence the discrimination–economic expectations relation. This paper was accepted by David Sraer, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.02276 .

Using a novel dataset with daily firm-level ESG information, we examine whether and how active mutual fund managers integrate ESG information into their portfolio decisions. Our results show that managers actively trade on ESG information, leading to improved portfolio performance. This enhanced risk-adjusted return is attributed to the incorporation of ESG information into asset prices rather than to price pressure on green assets. Additionally, fund managers adjust their portfolios to cater to investor demand, especially during periods of heightened ESG awareness. Further, funds located in Democratic states and those with higher ESG ratings exhibit a stronger inclination towards ESG integration.

Using hand-collected data on the cultural origins of S&P 500 CEOs and their spouses, we examine whether differences in risk attitudes within marriages influence corporate risk-taking behavior. We find that CEOs with more risk averse spouses adopt relatively safer corporate policies. The effect is stronger if the CEO comes from a more collectivist culture, has been married more recently, or shares more responsibilities with their spouse. Together, these findings suggest that the cultural composition of CEO household and spousal risk preference affect corporate risk-taking behavior.

This study shows that the geographic network of public firms facilitates the propagation of local economic conditions across the United States. We identify economic connections among U.S. states based on the 10‐K listings of public firms and show that the returns and liquidity of firms headquartered in connected states exhibit excess comovement. The economic connections also generate spillover effects where the economy of a state affects its connected states and amplifies the impact of local economic conditions on the U.S. economy. In particular, a 1% production increase in a large state like California is associated with a 6.71% change in annual U.S. GDP growth, relative to average GDP growth.

This study examines whether gambling preferences of investors distort their information processing activities and slow down information diffusion. Using overnight and intraday returns to identify investor clienteles, we demonstrate that gambling-motivated retail traders ignore firm-level information even when information is easily available. They remain net buyers of lottery stocks following the release of both positive and negative earnings news. In contrast, arbitrageurs respond to news more appropriately and attempt to correct potential mispricing generated by retail traders. Following earnings disclosures, opinion divergence between retail investors and arbitrageurs increases, generating short-term predictable patterns in returns.