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Behavioral Corporate Finance

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, Grand Ballroom B
Hosted By: American Finance Association
  • Chair: Geoffrey Tate, University of North Carolina

Limited Attention to Detail in Financial Markets

Henrik Cronqvist
University of Miami
Tomislav Ladika
University of Amsterdam
Zacharias Sautner
Frankfurt School of Finance and Management


We show that financial analysts and market investors reduced valuations following a large drop in accounting earnings that did not reveal new information about firm fundamentals. FAS 123-R required firms to begin expensing option compensation in income statements, instead of disclosing costs only in footnotes. We exploit that FAS 123-R's compliance dates were staggered quasi-randomly based on firms' fiscal year-ends. Firms that expensed options experienced a significant reduction in earnings growth, but their underlying profitability was unchanged. These firms were more likely to miss analysts' earnings forecasts, relative to firms that did not yet expense options. Analysts also more often revised down their recommendations, resulting in significant stock price underperformance. Our results are consistent with the limited attention hypothesis: Analysts and investors overvalue firms when value-relevant information is less accessible.

What Causes Passive Hedge Funds to Become Activists?

Marco Elia
Queensland University of Technology


About 20% of the total activist hedge funds’ positions are initiated as passive holdings, that is without the intention of changing or influencing the control of the target firms. At some point, however, the hedge funds change their filing status and switch to activism. My paper investigates what triggers this switch. I hypothesize and find that hedge funds see the purchase price of their passive positions as a reference point. When hedge funds are suffering losses on these positions, they are more likely to switch to become activists, even after controlling for the firms’ underperformance. This study presents new evidence about what causes hedge fund activism.

CAPM-Based Company (Mis)valuations

Olivier Dessaint
University of Toronto
Jacques Olivier
HEC Paris
Clemens Otto
Singapore Management University
David Thesmar
Massachusetts Institute of Technology


There is a discrepancy between CAPM-implied and realized returns. As a result, using the CAPM in capital budgeting decisions -- as is recommended in finance textbooks -- should have valuation effects. For instance, low beta projects are expected to be valued more by CAPM-using managers than by the market. This paper empirically tests this hypothesis using publicly announced M&A decisions. We show that takeovers of lower beta targets are accompanied by lower CARs for the bidder. Consistent with our hypothesis, the effect is more pronounced for larger acquisitions, higher growth targets, and private targets. Furthermore, low beta bidders are more likely to use their own stock to finance the deal. More generally, low beta firms are less likely to issue equity, and more likely to repurchase shares. These effects are not reversed in the long-run, suggesting that CAPM-using managers may be irrational, though this last test lacks power.

The Effect of Superstar Firms on College Major Choice

Darwin Choi
Chinese University of Hong Kong
Dong Lou
London School of Economics
Abhiroop Mukherjee
Hong Kong University of Science and Technology


We study the effect of superstar firms on college students’ major choice. The occurrence of superstar performers in an industry is followed by a significant rise in the number of college students choosing to major in related fields, after controlling for lagged industry returns and wages. The tendency to follow superstars, however, results in a temporary over-supply of human capital, as evidenced by the lower real wage earned by entry-level employees when students enter the job market. Further evidence from the National Survey of College Graduates shows that this adverse impact on career outcomes can last for decades.
Jonathan Cohn
University of Texas-Austin
Vyacheslav (Slava) Fos
Boston College
Ryan Pratt
Brigham Young University
Paige Ouimet
University of North Carolina
JEL Classifications
  • G3 - Corporate Finance and Governance