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  5. Asset Pricing: Behavioral Finance
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Asset Pricing: Behavioral Finance

Paper Session

Friday, Jan. 6, 2023 2:30 PM - 4:30 PM (CST)

Sheraton New Orleans, Rhythms III
Hosted By: American Finance Association
  • Chair: Alex Imas, University of Chicago

CEO Social Preferences and Layoffs

Marius Guenzel
,
University of Pennsylvania
Clint Hamilton
,
University of California-Berkeley
Ulrike Malmendier
,
University of California-Berkeley

Abstract

We study whether CEO social preferences influence firm decision-making with respect to employees, using a new dataset on layoff announcements by U.S. public firms. We first document sizable frictions in firms’ layoff decisions: after exogenous CEO changes, new CEOs make more, and shareholder value-increasing, layoffs. Consistent with a mechanism of social preferences arising through social interactions, CEOs become more reluctant to make layoffs over their tenure as they form more connections inside the firm. This effect is amplified for “difficult-to-implement” layoffs during recessions, near company headquarters, and during the holiday season. Finally, we document a personal cost of firing for CEOs in the form of accelerated long-run mortality.

Discontinued Positive Feedback Trading and the Decline of Return Predictability

Itzhak Ben-David
,
Ohio State University
Jiacui Li
,
University of Utah
Andrea Rossi
,
University of Arizona
Yang Song
,
University of Washington

Abstract

We show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the "dumb money effect" in mutual funds, experienced a sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the US market, and was concentrated in factors and mutual funds most exposed to the mechanism.

Retail Trading in Options and the Rise of the Big Three Wholesalers

Svetlana Bryzgalova
,
London Business School
Anna Pavlova
,
London Business School
Taisiya Sikorskaya
,
London Business School

Abstract

We document rapid increases in (i) retail trading in options and (ii) payment for order flow (PFOF), received by the U.S. retail brokerages from the so-called wholesalers in exchange for routing orders to them. Nearly 90% of PFOF comes from three wholesalers. Exploiting new flags in transaction-level data, we isolate wholesaler trades and build a novel measure of retail options trading. Our measure comoves with equity-based retail activity proxies and drops significantly during U.S. brokerage platform outages and trading restrictions. Retail investors prefer cheaper, weekly options, with the average bid-ask spread of a whopping 12.6%, and lose money on average.

Memory Moves Markets

Constantin Charles
,
University of Southern California

Abstract

I show that memory-induced attention can distort prices in financial markets. I exploit rigid earnings announcement schedules to identify which firms are associated in investors’ memory. Firms with randomly overlapping earnings announcements are associated in memory because they were experienced in the same context by many investors. Months later, when only one of the two firms announces earnings, this context is cued, and triggers the recall of the other, associated firm. On such days, I find that memory-induced attention leads to buying pressure in the associated firm’s stock. The strength of this effect varies as predicted by associative memory theory. Overall, my results suggest that economic models of human memory can explain behavior outside the laboratory and at the market level.

Discussant(s)
Paul Decaire
,
Arizona State University
Yang Sun
,
Brandeis University
Rawley Heimer
,
Boston College
Nancy Xu
,
Boston College
JEL Classifications
  • G1 - Asset Markets and Pricing