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Behavioral Corporate Finance

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Loews Philadelphia, Regency Ballroom C2
Hosted By: American Finance Association
  • Chair: Camelia M. Kuhnen, University of North Carolina

Short-term Investors, Long-term Investments, and Firm Value

Martijn Cremers
,
University of Notre Dame
Ankur Pareek
,
Rutgers University
Zacharias Sautner
,
Frankfurt School of Finance & Management

Abstract

This paper shows that an inflow of short-term institutional investors predicts an increase in the likelihood that firms cut R&D investment to report higher earnings and to generate positive earnings surprises, and it also predicts a temporary boost in firm valuations. When short-term investors subsequently leave, the reductions in R&D, higher earnings, and the increase in firm valuations are reversed. Our identification strategy exploits plausibly exogenous variation in the presence of short-term investors around Russell 2000 index inclusions, which are associated with a sharp temporary inflow of short-term investors and a permanent increase in institutional ownership and analyst coverage.

Optimism Propagation

Torsten Jochem
,
University of Amsterdam
Florian Peters
,
University of Amsterdam

Abstract

We develop an empirical framework for identifying bias correlation between agents using subjective expectations. We apply this framework to corporate managers and document that optimism spreads across firms along supply chains. Corroborating a causal mechanism of belief contagion, we find that biases in supplier forecasts are only affected by previously issued customer forecasts, not by those issued in the near future. Belief propagation increases when suppliers have less confidence in their own views and when the perceived precision and salience of customer forecasts increase. Propagated optimism causes changes in the financial policies of suppliers, suggesting that contagious sentiment contributes to fluctuations of business and credit cycles via production networks.

Stock Market Overvaluation, Moon Shots, and Corporate Innovation

Ming Dong
,
York University
David Hirshleifer
,
University of California-Irvine
Siew Hong Teoh
,
University of California-Irvine

Abstract

We test how market overvaluation affects corporate innovative activities and success. Estimated stock overvaluation is very strongly associated with R&D spending, innovative output, and measures of innovative novelty, originality, and scope. R&D is much more sensitive than capital investment to overvaluation. The effects of misvaluation on R&D come more from a non-equity channel than via equity issuance. The sensitivity of R&D and innovative output to misvaluation is greater among growth, overvalued, and high turnover firms. This evidence suggests that market overvaluation may have social value by increasing innovative output and by encouraging firm to engage in ‘moon shots.’
Discussant(s)
Pedro Matos
,
University of Virginia
Noah Stoffman
,
Indiana University
Itzhak Ben-David
,
Ohio State University and NBER
JEL Classifications
  • G3 - Corporate Finance and Governance