We examine the impact of foreign equity flows on the Chinese stock market, identifying a novel channel through which retail investors’ herding generates significant market externalities. We find that the mandatory daily disclosure of foreign institutional holdings induces local investors to imitate these trades, resulting in pronounced price distortions and subsequent reversals. Utilizing inflow predictability tests and path analysis decomposition, we demonstrate that the herding effect driven by retail participants carries greater price impact than the direct informational content of the foreign capital itself. Furthermore, we document that the inflated valuations resulting from retail herding lead to corporate overinvestment and a significant reduction in investment efficiency. Our findings highlight the unintended consequences in markets dominated by noise traders, suggesting that position disclosure can inadvertently undermine both market stability and the efficiency of capital allocation.

Important academic analyses of price formation in the equity markets are based on the assumption that participants have homogeneous expectations. Relaxing this assumption, we deal with the reality that, because information sets are typically large and complex, investors have divergent expectations. In a divergent-expectation environment, price discovery is a dynamic, complex, noisy process that involves elevated short-period price volatility and return autocorrelations of first and higher orders. In the dynamic environment of divergent expectations and noisy price discovery, liquidity is impaired and market structure matters.

We use granular account-level data from margin trading during the 2015 stock market crash in China to compute each stock's exposure to fire sale risks during the market turmoil. When we form the treatment group of stocks with low exposures and the control group of stocks with high exposures, we find that the diff-in-diff regression using this setting generates results qualitatively similar to the regression based on treatment/control groups setting according to whether the stock was in the STOCK-CONNECT list after 2015. When we re-run the regressions to examine the effects of the introduction of STOCK-CONNECT program in a subsample of stocks with similar exposures to fire sale risks, the difference between impact of stock market liberalization on stocks tradable by foreign investors and on stocks not tradable by foreign investors become insignificant. Our empirical results provide evidence supporting the conjecture that the effects of two salient events (the introduction of the STOCK-CONNECT and the stock bubble formation and burst) mix together.

We examine a unique one day lockup constraint in stock markets in China. Buyers of Chinese stocks are subject to a one day lockup and cannot sell their shares until the next day, but warrant traders are free of such restrictions. We demonstrate that the lockup creates a price discount relative to stock value implied by warrants. We show that the discount decreases throughout the trading day and investors tend to purchase stocks when the lockup becomes less binding. We also find the non-marketability discount in the Huaxia 50 ETF market, with help from the newly introduced ETF options in China.

This paper examines the impact of analyst corporate site visits on stock price crash risk using a unique data set of Chinese A-share stocks listed on the Shenzhen stock exchange (SZSE) over the 2012–2019 period. We find that the frequency of analyst corporate site visits is positively correlated with stock price crash risk, and this positive relationship is mainly significant in the situation that analysts keep silent after visiting. This positive association remains robust after using alternative measures of crash risk and analyst silence. The results still hold after re-estimating our regression using the Heckman self-selection model to control for selection bias. Finally, we find that analyst silence, which happens after visits participated by more than one brokerage, star analysts, or fund companies, has a more significant impact on stock price crash risk.

This article examines the strategy of shorting a pair of leveraged ETFs and inverse leveraged ETFs of the same index. The profitability of this strategy does not depend on the direction of the underlying benchmark. The authors derive an approximation formula to show that the expected return is high when the weighted sum of various orders of autocorrelations is negative and the volatility of the underlying index is high. They then study the trading strategy in six markets and show that it can generate mean monthly returns of over 1% in four markets. The returns can be further enhanced if they exploit the persistence of the volatility and start the shorting pair strategy when the observed volatility is high. TOPICS:Portfolio construction, exchange-traded funds and applications, volatility measures

Using an instrumental variable approach that exploits an exogenous variation of passive institutional ownership caused by Russell 1000/2000 index reconstitution, we find that greater passive institutional ownership leads to improvement in corporate innovation measured by patent quantity and quality. Our results are robust to alternative setup of regression discontinuity design and a refinement to improve the approximation of the end-of-May market capitalization that Russell uses for index assignment. We identify three channels for such effect: first, the increased presence of passive institutional investors transfers more power to the manager; second, passive institutional ownership reduces the likelihood of CEO turnover especially for firms that outperform their industry peers; third, greater passive institutional ownership is associated with a wider adoption of non-executive employee stock options, which helps incentivize innovative activities.

We study the performance of hated stocks, defined as stocks with the average analyst re commendation level of hold or worse. From 2009 to 2016, this group of hated stocks in S&P 500 performs better than the other stocks in S&P 500. When we extend the sample to all stocks with at least five analysts following, hated stocks again outperform non-hated stocks in the same time period. However, this result is driven by two factors: the impact of the time period of 2009 and 2010, and low priced stocks. If we start the strategy of investing in hated stocks at the beginning of 2011, or if we exclude low priced stocks, there is no significant outperformance of the hated stocks.

This paper develops and experimentally implements a simple multi-negotiation bargaining game, in which one agent, called the "developer," must reach agreements with a series of other agents, called "landowners," in order to implement a value-increasing project. The game has a unique subgame perfect Nash equilibrium under which the surplus from the project is split between the landowner and developer without any dissipation of value. In the actual experiments, however, on average almost half of the value of the project was dissipated. The costs of dissipation fell disproportionately on the developer, who was able to capture less than 5% of the value generated by the project. The results of this experiment call into question the ability of private negotiations between a large number of parties, even in a world without explicit contracting costs, to induce Pareto-optimal allocations of property rights.

Malmendier and Shanthikumar (2014) find that some analysts issue relatively higher stock recommendations and relatively lower earnings forecast of the same firm on the same day. They describe this behavior as speaking in two different tongues. In this paper, we explore the cost of this strategy on financial analysts. We show that when analysts employ the two-tongue strategy, they are sacrificing their forecasting accuracy on the target firms. Taking the two-tongue strategy in the previous year helps the analyst’s career in terms of staying in the same firm or avoiding being demoted to a smaller brokerage firm. However, this strategy reduces the analyst’s probability to move to a top ten brokerage house or to be nominated as an All-Star analyst. Finally, investors respond less positively to the higher stock recommendations when analysts issue high recommendation and low earnings forecast at the same time.

Future Economic Information Embedded in High Yield SpreadsThe financial accelerator mechanism, also called credit channel theory (Bernanke and Gertler [1995] and Bernanke and Gertler, and Gilchrist [1996]), assumes external financing is more costly than internal financing in the absence of full collateralization. The difference between external and internal costs is called “external finance premium” and arises from agency costs associated with asymmetric information about the firm’s net worth, defined as the sum of all liquid and illiquid assets minus debt. The external finance premium is inversely related to the firm’s net worth.Firms with poor credit are at the heart of the financial accelerator mechanism, and one can proxy for “external finance premium” using the spread paid by the poor-quality (high-yield) firms over the high-quality firms. In the parlance of the “financial accelerator mechanism,” a reduction of high-yield spread is the harbinger of future boom, and an increase in high-yield spread predicts a decline in economic activity. This article examines the significance of the spread variable to predict various economic variables. We control for momentum in the economic variable by including the four lagged quarters of the economic variable. We look at the growth rate of a broad spectrum of the economy; having tested the relationship between 84 economic measures and the four lagged measures of growth in high-yield spread, we report that 58 of the economic variables tested have statistically significant coefficients.

We investigate the importance of board expertise by analyzing the role of “directors from related industries” (DRIs) on a firm’s board. DRIs are officers and/or directors of companies in the upstream (supplier) or downstream (customer) industries of the firm. About 40% of firm-years in our sample have at least one DRI. We propose and test information, market structure, and agency hypotheses about when DRIs are likely to add value. Consistent with the information hypothesis, DRIs are present when the information gap is more severe, such as in innovative firms/industries and in firms with less informative stock prices. Consistent with the market structure hypothesis, DRIs are also more likely in firms with larger market share and in more concentrated or vertically integrated industries. After correcting for endogeneity, DRIs have an economically significant impact on firm value and performance – especially when information problems are worse and boards have relatively greater power to monitor managers. Hence, a possible explanation for DRIs not being sought more widely is managerial resistance to monitoring by a better informed board. Finally, DRIs appear to enhance the ability of firms to handle negative industry shocks, suggesting that they narrow the information gap.

We model the natural evolution of private information over the life of a venture capitalist financed project. In the early stages, the entrepreneur is better informed regarding the project, and when the project matures, the venture capitalist has an informational advantage over the entrepreneur. Within this framework, we examine how the venture capitalist's relative bargaining power affects cash flow rights and investment. When the bargaining advantage lies with the entrepreneur, the project may not be screened, and the venture capitalist may acquiesce to excessive initial investment but subsequently terminate the project. Increased venture capitalist bargaining power encourages project screening, attenuates the incentive to overinvest, and reduces the incidence of project termination subsequent to the initial investment. The payoff sensitivity of venture capitalist's financing contract also increases as his bargaining power improves.

In this paper we model regimes and long memory in the dynamics of realized volatilities of intraday ETF and stock returns. We estimate threshold fractionally integrated (TARFIMA) models using Bayesian Markov Chain Monte Carlo (MCMC) algorithms with efficient jump. We also introduce a test based on posterior distributions of the mean squared forecast errors for model selection. Our findings are that the TARFIMA model that accounts for a different degree of long memory, persistence and variance in two regimes outperforms ARFIMA and other models using 5 day forecasts.

In this article, we study leveraged ETFs, in particular, Ultra ETFs and UltraShort ETFs from the ProShares family. These Ultra (UltraShort) ETFs are designed to provide twice (twice the opposite) of the performance of the benchmark on a daily basis. We focus on the relation between long term performance of leveraged ETFs and benchmarks. Our results show that over holding periods no greater than one month, an investor can safely assume that the Ultra (UltraShort) ETF would provide twice the return (twice the negative return) of the underlying benchmark. Over the holding period of one quarter, the UltraShort ETFs can deviate from twice the negative returns of the benchmark. For Ultra ETFs, this deviation occurs when the holding period is one year. Finally, we show that the long term performance of the leveraged ETFs is negatively impacted by the quadratic variation and the auto-variation during the period, with auto-variation being the more dominant factor.

We examine auction design in a context where symmetrically informed adaptive agents with common valuations learn to bid for a good. Despite the absence of private valuations, asymmetric information, or risk aversion, bidder strategies do not converge to the Bertrand–Nash equilibrium strategies even in the long run. Deviations from equilibrium strategies depend on uncertainty regarding the value of the good, auction structure, the agentsʼ learning model, and the number of bidders. Although individual agents learn Nash bidding strategies in isolation, the learning of each agent, by flattening the best-reply correspondence of other agents, blocks common learning. These negative externalities are more severe in second-price auctions, auctions with many bidders, and auctions where the good has an uncertain value ex post.

This paper examines block transactions in the Chinese equity market. We find that most of the block transactions are traded at prices at or below the closing price of the regular continuous auction market, and more than half are traded at or below the lowest price of the day. Consistent with the price pattern indicating that the block transactions are seller-initiated, the overall market reaction is negative. However, we find a different market reaction to block transactions when the buyer is represented by China International Capital Corporation (CICC), the number one investment bank in China which counts many foreign institutional investors as its clients. The positive reaction is consistent with the buyer-certification hypothesis, that is, the fact that some smart institutional buyers enter block trade indicates the buyers' assessment of undervaluation.

This paper investigates the changes in credit spread volatility during 1993-2001. We find that the credit spreads between junk-grade corporate bonds and Treasury bonds were significantly more volatile in the second half of this period when credit-related securities became popular. In contrast, investment-grade bonds exhibited no significant change in volatility. The junk bonds variance ratios changed from being less than one to greater than one. Using the GJR-Garch model, the conditional volatilities of junk bonds increased in the second half of the period and the mean reversion speeds slowed, suggesting a longer time for mean reversion to occur. Our analysis rules out treasury volatility, credit spread level, equity market return, T-bill rate, curvature of the Treasury curve, financial crisis, quantity of defaults and standard deviation of defaults as explanations for the increase in junk bond volatility. In contrast, volatility of equity returns provides a partial explanation of junk bond spread volatility in the later period.

This paper examines the effect of managerial stock holdings on corporate dividend payments under the new dividend tax environment. Utilizing a very rare event on dividend tax rate cut introduced in May 2003, this paper allows us to fully investigate whether managers holding sizable stakes direct their corporations to raise dividends for their own benefits. Our results show that managerial stock holdings have significantly positive effect on both the likelihood and the extent of dividend increase in year 2003. However, there is no such relation for the period of 1993 through 2002. Similar to the previous studies, managerial stock options are negatively related to dividend payment increases both before and after dividend tax cut.

We study whether analysts’ recommendations and the market’s reactions to recommendation changes are influenced by the structure of analysts’ research portfolios. We find that analysts maintain more positive recommendations for stocks that belong to the “core industry” in their research portfolios, and are more likely to upgrade these core stocks. Consequently, diversified analysts, who cover stocks from industries other than their core industry, make less optimistic recommendations and are less likely to upgrade their recommendations. We also find that the market’s reactions, captured by announcement returns, are stronger for recommendation changes for non-core stocks and recommendation changes made by diversified analysts. Finally, all these patterns are significantly less pronounced after the passage of Regulation Fair Disclosure, suggesting that the bias in recommendations is the result of strategic considerations and not self-selection.