ABSTRACT We introduce the idiosyncratic volatility spread as a novel measure of the stock‐level investor sophistication. Our study reveals a negative relation between investor sophistication and stock returns, particularly for stocks with more binding short‐sale constraints. Importantly, this negative relation cannot be attributed to variables that affect the idiosyncratic volatility–return relation. Our findings hold across different factor models and estimation methods, demonstrating the robustness of the results. Furthermore, we observe that this relation is more pronounced during periods characterized by high investor sentiment, high market uncertainty, and economic contractions. Further tests suggest that investor sophistication introduces heterogeneity in beliefs among investors due to their varying model selection, demonstrating that investor sophistication is not driven solely by disagreement.

We utilize an intertemporal CAPM (Merton, 1973) framework to examine how exposure to currency risk is priced in foreign equity markets. We identify the fundamental determinants of foreign equity return and foreign currency loadings with respect to a world equity factor and global currency risk factor. To capture the time-varying nature of risk exposures, we employ the mean-reverting dynamic conditional correlation (DCC) model of Engle (2002) to estimate conditional covariances and betas. Our regression results show that estimated risk-return coefficients on betas and covariances are significant and robust to subsample tests based on emerging markets and developed markets. We also show that the risk-return tradeoff on foreign equity returns and relative risk aversion vary cyclically across financial stress regimes.

The clawback provision is designed to curb incentives for fraudulent reporting and enhance the quality of financial disclosures. According to Bonding Hypothesis, firms that voluntarily adopt clawback provisions in their proxy statements exhibit significantly better investor protection and lower information asymmetry between managers and investors. As this asymmetry declines, excess cash positively contributes to firm valuation in firms with clawback provisions, whereas it does not add value in firms without such provisions. Consistent with the Bonding Hypothesis and free cash flow theory, enhanced transparency reduces agency costs and increases the marginal value of excess cash. This positive valuation effect is particularly pronounced among firms that adopted clawback provisions following a history of earnings restatements.

This study examines the role of market disagreement in explaining the cross-section of hedge fund performance. In a market where disagreement fluctuates, skilled arbitrageurs may employ trading strategies to exploit the mispricing caused by disagreement and short-sale constraints. Skilled hedge funds with high sensitivity to disagreement can take advantage of mispricing in high-disagreement periods to improve their performance. We show that hedge funds with a high disagreement beta tend to possess skill in exploiting disagreement and, as such, they can earn higher cross-sectional returns compared to other hedge funds lacking this skill. Existing risk factors and a tradable disagreement factor do not fully explain the difference in hedge fund performance between those with high and low disagreement betas. Further evidence shows that experienced hedge funds and hedge funds that charge a high incentive fee are likely to have high disagreement betas. Our empirical findings are robust in using various disagreement measures and methodologies to estimate disagreement beta.

This study examines the role of market disagreement in explaining the cross-section of hedge fund performance. In a market where disagreement fluctuates, skilled arbitrageurs may employ trading strategies to exploit the mispricing caused by disagreement and short-sale constraints. Skilled hedge funds with high sensitivity to disagreement can take advantage of mispricing in high-disagreement periods to improve their performance. We show that hedge funds with a high disagreement beta tend to possess skill in exploiting disagreement and, as such, they can earn higher cross-sectional returns compared to other hedge funds lacking this skill. Existing risk factors and a tradable disagreement factor do not fully explain the difference in hedge fund performance between those with high and low disagreement betas. Further evidence shows that experienced hedge funds and hedge funds that charge a high incentive fee are likely to have high disagreement betas. Our empirical findings are robust in using various disagreement measures and methodologies to estimate disagreement beta.

We use Yelp restaurant customer reviews to construct a novel consumption-based sentiment index. Our weekly index is based on the positive-to-negative user ratings ratio to capture an embedded element of sentiment associated with consumption. To validate that our measure captures consumption sentiment, we show that it is correlated with aggregate market risk aversion. Furthermore, consistent with a flight to safety, our index predicts mutual fund flows from bond to equity funds. We find that consumption sentiment predicts stock return reversals, an effect that is particularly strong for difficult-to-arbitrage stocks. The evidence suggests that our consumption sentiment index captures sentiment-induced mispricing in the stock market. When we decompose our index into components of optimism and pessimism, we find that pessimism drives the predictive power of the index, a result that gives direct evidence for the negativity bias in our context.

We test the impact of GHG emissions on equity markets' volatility. Our results confirm that CO2 and other greenhouse gases emissions such as agricultural nitrous oxide, and methane emissions are associated with increased stock market volatility. This relationship holds across different measures of volatility, emissions, and specifications using nearly 30 years' worth of index-level data from stock exchanges across 50 countries. These findings lend support to the notion that carbon risk is priced into financial markets, and that green finance could promote more stable global equity markets in the future and thereby foster a more sustainable economic system.

The asset pricing Literature suggests market sentiment is a state variable. This study shows that market sentiment is positively priced at the cross-section of stock returns, conditional on aggregate investors' sentiment. We estimate individual stock sentiment beta and find that, following low-sentiment periods, stocks in the highest sentiment beta quintile generate a 0.74% higher monthly return than stocks in the lowest sentiment beta quintile. However, this return spread is insignificant following medium- or high-sentiment periods. This finding is consistent with the argument that overpricing following high-sentiment periods is more prevalent than underpricing following low-sentiment periods due to short-sale constraints.

We illustrate the concept of using a Turing complete consortium blockchain (TCCB) to facilitate international countertrade. Physical goods and services would be linked to the blockchain by associating them with corresponding non-fungible tokens (NFTs). TCCBs could help small or new companies, particularly those in less developed countries, reduce the counterparty risk and transaction costs related to logistic chain management and contract arbitration. They could also supplement trade financing that often requires a mature banking system and developed financial market. We analyze the concept using a hypothetical example to illustrate the potential efficiencies over traditional countertrade transactions.

We study how climate risk shapes accounting conservatism with data collected from 47 countries. The results suggest that firms that are exposed to higher climate risk use more conditional conservatism, but less unconditional conservatism in their financial reporting. Furthermore, the effect of climate risk on both unconditional conservatism and conditional conservatism is significantly strengthened, both statistically and economically, in well-governed countries. We also find that in countries with higher uncertainty avoidance, the effect of climate risk on unconditional conservatism is significantly enhanced but the effect on conditional conservatism is significantly weakened. Our findings, which are robustly supported by a number of sensitivity checks, enrich the emerging literature on the socio-economic impact of climate risk.

We study how climate risk shapes accounting conservatism with data collected from 47 countries. The results suggest that firms that are exposed to higher climate risk use more conditional conservatism, but less unconditional conservatism in their financial reporting. Furthermore, the effect of climate risk on both unconditional conservatism and conditional conservatism is significantly strengthened, both statistically and economically, in well-governed countries. We also find that in countries with higher uncertainty avoidance, the effect of climate risk on unconditional conservatism is significantly enhanced but the effect on conditional conservatism is significantly weakened. Our findings, which are robustly supported by a number of sensitivity checks, enrich the emerging literature on the socio-economic impact of climate risk.

This study examines how high-speed rail network impacts the energy consumption of hi -tech firms along the line. The results show that the opening of high-speed railway stations in a county leads to reduction in energy consumption by hi -tech firms in the county. This effect is stronger with increased density of railway lines in the region. The study identifies two key mechanisms underlying this effect: enhanced financing access and increased overseas outreach. Our findings reveal that improved financing access to public market capital, bank loans, and venture financing enables hi -tech firms to invest in international outreach activities. We also conduct additional analysis to explore nuanced conditions regarding the types of hi -tech firms that benefit the most from being located in a high-speed rail city. Contributions to the emerging field of corporate energy saving are discussed.

Results from a large sample of individual Chinese investors demonstrate that they were more likely to trade stocks for short-term speculation after experiencing trauma such as natural disasters, serious illness, or death in their immediate family. They exhibited higher impulsivity, a greater desire for immediate gratification, a greater willingness to follow trends, and more risktaking behaviors as a result of the trauma experience. The data also show that the negative relation between trauma experience and investment horizon is less pronounced for older and married individuals.

We find that most IPO firms will run out of cash soon if they did not receive proceeds from IPOs. The cash shortfalls are not caused by increases in capital expenditure, R&D, M&A, or debt repayment and persist during the 5 years after IPO. Negative net cash flows help explain the persistent cash shortfalls. These results are consistent with the funding horizon theory. IPO firms with more initial cash shortfalls also have lower cash flows in the next 5 years, suggesting that initial cash shortfalls can be used to predict the future operating performance of IPO firms.

Given the recent increases in fraud targeted at households, we examine the effect of household-level fraud experience on investment behavior for a representative sample of Chinese households. Using a difference-in-differences approach with matching, we find that households exposed to fraud are less likely to invest in high-risk assets such as stocks and derivatives and allocate less of their portfolio to high-risk assets. We find that the relationship between fraud experience and investment behavior is driven by households with high risk aversion and not low trust.

Based on antidumping (AD) cases initiated by 25 countries/regions against China, this study explores AD's effects on exporters' performance and their subsequent response. We find that AD significantly reduces targeted exporters' profitability, market value and export volume. Exporters try to increase their domestic sales and profits by reducing profit margins and period expenses, as the main response. The responses effectively counteract the profit reduction in 1-2 years. Further tests reveal that exporters learn from previous cases and that the follow-up AD cases cannot considerably damage exporters' profitability; however, the negative effects on market value and export volume still exist.

We examine the return information conveyed by a firm’s dividend surprise, defined as the difference between a firm’s actual dividend per share (DPS) and investors’ expected DPS. We find that negative-surprise stocks (i.e., stocks in the lowest dividend surprise quintile) provide 5.64% more in annualized return than positive-surprise stocks (i.e., stocks in the highest dividend surprise quintile). Compared with positive-surprise firms, negative-surprise firms are more financially constrained in the future, thereby generating higher returns. Our paper highlights the unique importance of cash dividends relative to share repurchases in investors’ valuation process.

We propose idiosyncratic volatility based return spread as a new measure of the stock-level value of investor sophistication. We find that stocks with a high value of investor sophistication tend to have low average returns, and this effect is pronounced for highly short-sale constrained stocks. The negative relation between expected stock returns and the value of investor sophistication is not explained by variables that affect the relation between idiosyncratic volatility and returns. Our results are robust with respect to whether idiosyncratic volatility is estimated using different factor models or methods. Such relation is more prominent in periods of high investor sentiment, high market uncertainty, and economic contraction.