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  3. 2022
  4. Preliminary Program
  5. Who Is Paying Attention? Benefits of Information in Capital Markets
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Who Is Paying Attention? Benefits of Information in Capital Markets

Paper Session

Saturday, Jan. 8, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Sabrina Howell, New York University

Market Feedback: Evidence from the Horse’s Mouth

Itay Goldstein
,
University of Pennsylvania
Bibo Liu
,
Tsinghua University
Liyan Yang
,
University of Toronto

Abstract

We survey 3,626 Chinese public firms to examine the real consequences of financial markets. More than 90% of firms pay attention to the stock market, for the purposes of learning information from the market to guide real investment decisions and of accessing external financing. These findings provide direct evidence for the wide existence of market feedback effect via a learning channel and a financing channel. Firms are more likely to learn information when their stock prices contain more information produced by analysts, when managers are less informed, and when market participants have more private information. Firms are more likely to monitor the stock market for the financing reason when they are more financially constrained and when have larger capital needs. Our analysis thus provides substantial support for that financial markets are not only a side show, but instead, affect real economy.

Speculative and Informative: Lessons from Market Reactions to Speculation Cues

J. Anthony Cookson
,
University of Colorado-Boulder
S. Katie Moon
,
University of Colorado-Boulder
Joonki Noh
,
Case Western Reserve University

Abstract

Speculation in corporate disclosures can convey valuable information on firms’ fundamentals. We evaluate this idea by developing a measure for speculative statements based on sentences marked with the “weasel tag” on Wikipedia. In the 10 weeks after filing, greater use of speculative statements in 10-Ks predicts positive and non-reverting abnormal returns, improvements to stock liquidity, more insider and informed buying, and more positive news sentiment. These findings are driven by disclosures that are more forward-looking and use more R&D terms. Together, our results imply that speculative statements in 10-Ks contain new information on positive but yet immature prospects of future cash flows.

On the Origin of IPO Profits

David Brown
,
University of Arizona
Sergey Kovbasyuk
,
New Economic School
Tamara Nefedova
,
Paris Dauphine University

Abstract

By combining investors' portfolio holdings and trading and commissions data, we analyze the relations between investor characteristics and IPO allocations. We distinguish among common explanations for investors' IPO profits: information revelation, quid pro quo arrangements (related to commissions), and post-IPO trading behaviors. We find that information proxies explain the majority of the variation in IPO profits, while commissions and post-IPO trading behaviors explain relatively little. Commissions and post-IPO trading matter at the extensive, but not intensive, margins, while information matters at both. Different explanations matter for allocations and IPO profits to Investment Managers, Hedge Funds, and Banks/Pensions/Insurers.

The Role of "Expert Reviewers" in Private Capital Markets

Reena Aggarwal
,
Georgetown University
Kathleen Weiss Hanley
,
Lehigh University
Xiaofei Zhao
,
Georgetown University

Abstract

We study how unregulated private capital markets overcome information frictions and conflicts of interest by examining the newly introduced market for initial coin offerings (ICOs). Listing platforms provide investors and issuers with metrics to evaluate these offerings, the most important of which is crowdsourcing information from ``expert' reviewers. Many of these experts provide both a numerical rating and a textual review and we find that each provides unique information to investors. We document that experts are motivated to provide a narrative review as they gain experience and receive more positive feedback from the community. Using a new method to capture the sentiment of the review, we find that the more positive the textual review, the greater the proceeds raised even after controlling for both the reviewer's and the third-party platform's numerical rating. Finally, we show that experts with greater potential conflicts of interest write reviews that are more positive, but investors appear to be able to identify these conflicts and discount the impact of their reviews.

Discussant(s)
Laurent Fresard
,
University of Lugano and Swiss Finance Institute
Michael Weisbach
,
Ohio State University
Tim Jenkinson
,
University of Oxford
Marina Niessner
,
University of Pennsylvania
JEL Classifications
  • G0 - General