Corporate Finance: Behavioral
Paper Session
Saturday, Jan. 6, 2024 2:30 PM - 4:30 PM (CST)
- Chair: Lin Peng, CUNY-Baruch College
Does Greater Public Scrutiny Hurt a Firm’s Performance?
Abstract
Public attention to a firm may provide valuable monitoring, but it may also have a dark side by constraining management’s decisions and distracting it. We use inclusion in the S&P 500 index as a positive shock to public attention. Media coverage, Google searches, SEC downloads, SEC comment letters, shareholder proposals, analyst coverage, and lawsuits increase following inclusion. Post-inclusion performance falls and is negatively related to the increase in attention. Included firms’ investment and payout policies become more similar to those of index peers and the increase in similarity is positively related to the size of the attention increase.The Real Effects of Sentiment and Uncertainty
Abstract
The effects of sentiment should be strongest during times of heightened valuation uncertainty. As such, we document a significant amplifying role for market uncertainty in the relation between sentiment and aggregate investment. A one-standard-deviation increase in uncertainty more than doubles the effect of sentiment on investment. Moreover, allowing uncertainty-dependent sentiment effects substantially increases explanatory power (i.e., R2). Our results are robust to many sentiment, uncertainty, and investment measures. We also document similar effects for aggregate equity issuance. Consistent with theory, we find even stronger results in the cross-section of valuation uncertainty. The evidence suggests that the importance of sentiment for corporate decisions varies over time and depends crucially on the underlying level of market uncertainty.The Impact of Beliefs on Credit Markets: Evidence from Rating Agencies
Abstract
An open question in finance and economics is how the beliefs of agents affect the credit cycle and real economic activity. We analyze the impact of beliefs on credit market conditions in the context of credit rating agencies (CRAs). We measure CRAs' subjective beliefs as the difference between their predictions of future aggregate credit spreads and the consensus forecasts of other financial institutions. When CRAs are relatively more optimistic, they issue higher credit ratings even though their forecasts do not contain additional information regarding future credit market conditions. This optimism leads to lower initial yields and subsequent negative returns for newly issued bonds. In response to this mispricing, firms increase their debt, leverage, and investment, where the effects are concentrated among rated firms. A one standard deviation increase in CRA optimism results in a 3.5% increase in leverage and a 2% increase in investment among rated firms. Our analysis shows how subjective beliefs drive aggregate financing and investment behavior through mispricing in credit markets.Discussant(s)
Ron Kaniel
,
University of Rochester
Zhi Da
,
University of Notre Dame
R. david Mclean
,
Georgetown University
Marco Giacoletti
,
University of Southern California
JEL Classifications
- G3 - Corporate Finance and Governance