We investigate the role of strategic security design in the market for retail investment products. Focusing on a dominant yet understudied design feature, we provide evidence consistent with issuers' strategic increase of product complexity to mitigate price competition. Complexity facilitates product differentiation, thereby impairing investors' ability to compare products. Because more complex products entail greater markups, imply higher tail risk, and are first-order stochastically dominated by simpler products, the empirically observed rise in market complexity increases uncompensated risk-taking, particularly among less sophisticated investors. Overall, our findings indicate that complexity is shaped by issuers' deliberate design choice to preserve product rents.

This study investigates the role of asymmetric information for the pricing, issuance volume, and design of innovative securities. By analyzing the information that structured product issuers provide to the investors of those products, we can identify specific sources of asymmetric information between the issuers and investors in this market. We show that issuers exploit this information friction to offer products to investors that appear more profitable for the issuer. In addition, we find that the friction induces issuers to design products with higher information asymmetry. Our results suggest that product issuers’ behavior increases information frictions in the financial system.

Book-to-market, profitability, and investment - the characteristics underlying the Fama-French value, profitability, and investment factors - are imperfect indicators of expected returns. This study narrows down the characteristics' expected return information and uses their informative parts to construct enhanced factors. These informative factors exhibit around 50% higher Sharpe ratios than their standard counterparts. They strongly outperform the standard Fama-French factors regarding the maximum Sharpe ratio criterion and in pricing characteristics-sorted portfolios. Importantly, unlike the standard factors, the informative factors exhibit positive risk prices, making them genuine risk factor candidates. Moreover, our procedure to enhance the factors outperforms other enhancement procedures.

This study investigates how a ban on kickbacks impacts individual investors' asset allocation and portfolio performance. To do so, we exploit a court ruling in Switzerland that forced some banks to ban kickbacks. We document a significant increase in the portfolio share of own-bank mutual funds and own-bank structured products following the ban, consistent with banks substituting revenues from kickbacks with revenues from own products. The poor performance of own-bank products negatively affects portfolio performance. We find the effect to be more pronounced for less sophisticated investors. Overall, our results point towards an unintended consequence of a ban on kickbacks.

We argue that the value factor's strong relation to the investment factor, being responsible for the value factor's documented redundancy, arises because book-to-market and investment are both driven by cash flow and discount rate shocks. Our results are consistent with this thesis: only market rather than book equity changes drive book-to-market's negative relation with investment, and only market equity-driven value and growth stocks give rise to the value factor's comovement with the investment factor. Furthermore, we find that only book-to-market and investment changes that are due to discount rate rather than cash flow shocks predict returns, and that the value and investment premia are exclusively earned by those stocks whose book-to-market and investment are driven by discount rate shocks. These stocks' value and investment premia are roughly 50\% larger than the standard premia. Finally, we show that the value factor would not be redundant if both factors comprise only such discount rate shock-driven stocks. The redundancy of the value factor arises because both factors capture not only the priced covariation associated with discount rate shocks but also the unpriced covariation associated with cash flow shocks.

We exploit variation in the ancestries of U.S. equity mutual fund managers and show that ancestry affects portfolio decisions. Controlling for fund firm location, we find that funds overweight stocks from their managers' ancestral home countries in their non-U.S. portfolio by 132 bps or 20.34% compared with their peers. Similarly, funds overweight industries that are comparatively large in their manager's ancestral home countries. The documented ancestral biases are pervasive across fund styles and across different manager ancestries. The effect is more pronounced for funds that are less resource-constrained and for managers whose connection to their ancestral home country is more recent. Stocks linked to managers' ancestry do not outperform stocks in the same countries and industries but held by managers of other ancestry, confirming that ancestry-linked investments are not informed.

This paper examines obfuscation through complexity of financial innovations in the presence of investor learning. By exploiting the staggered adoption of a price disclosure policy for issuers of retail structured products, I provide evidence that issuers subject to price disclosure significantly increase the complexity of their products over time. I show that an increase in complexity significantly reduces the price elasticity of demand. This finding raises the concern that complexity induces social welfare cost. Market competition further intensifies the obfuscation activities of issuers. Overall, the results suggest that policies that target investor learning can yield adverse effects.

This paper investigates the role of incomplete investor information for the pricing, demand, and design of innovative securities. By analyzing the information that structured product issuers provide to the investors of those products, we can identify specific sources of incomplete investor information in this market. We show that the issuers exploit these information frictions to push overpriced securities to investors. We also estimate the welfare implications of this behavior. In addition, we find that incomplete investor information induces issuers to design products with high information frictions. Our results suggest that product issuers' behavior increases information frictions in the financial system.