Market Strategy
The Allocation of Socially Responsible Capital
Daniel Green & Benjamin Roth
Journal of Finance, April 2025, Pages 755-781
Abstract:
Portfolio allocation decisions increasingly incorporate social values. We develop a tractable framework to study how competition between investors to own socially valuable assets affects social welfare. Relative to the most common social-investing strategies, we identify alternative strategies that result in higher impact and higher financial returns. We identify strategies for investors to have impact when impact is difficult to measure. From the firm's perspective, increasing profitability can have greater impact than directly increasing social value. We present new empirical evidence on the social preferences of investors that demonstrates the practical relevance of our theory.
At the Top of the Mind: Peak Prices and the Disposition Effect
Edika Quispe-Torreblanca et al.
Journal of Political Economy Microeconomics, forthcoming
Abstract:
The disposition effect is the reluctance to sell assets at a loss relative to a salient point of reference, typically assumed to be the purchase price. Using data on stocks and housing sales, we show that the peak price achieved by an asset during the investor's period of holding constitutes an additional salient reference point for asset owners that overlaps, and interacts, with the purchase price reference point. Peaks occurring before the investor purchased the asset do not affect future sales, indicating that ownership affects how investors form reference points.
An Alpha in Affordable Housing?
Sven Damen, Matthijs Korevaar & Stijn Van Nieuwerburgh
NBER Working Paper, February 2025
Abstract:
Residential properties with the lowest rent levels provide the highest investment returns to their owners. Using detailed rent, cost, and price data from the United States, Belgium, and The Netherlands, we show that this phenomenon holds across housing markets and time. If anything, low-rent units hedge business cycle risk. We also find no evidence for differential regulatory risk exposure. We document segmentation of investors, with large corporate landlords shying away from the low-tier segment possibly for reputational reasons. Financial constraints prevent renters from purchasing their property and medium-sized landlords from scaling up, sustaining excess risk-adjusted returns. Low-income tenants ultimately pay the price for this segmentation in the form of a high rent burden.
Analysts' Belief Formation in Their Own Words
Shikun Ke
Yale Working Paper, March 2025
Abstract:
I study the formation of analysts' subjective beliefs about firms' earnings using analysts' own written text from over 1.1 million equity research reports. Text in analyst reports strongly predicts analysts' forecast revisions and forecast errors. Using a Large Language Model, I distinguish between factual and subjective content and distill it into interpretable topics on firm fundamentals. I document three sets of novel findings regarding analysts' subjective beliefs. (1) I show that analysts' attention allocation varies significantly over business cycles, firms, and forecast horizons. Analysts pay more attention to profitability information during booms and pay more attention to financial conditions and macroeconomics during recessions. These patterns align with a model of rational inattention. (2) I introduce a novel text-instrumented Coibion-Gorodnichenko regression to study analysts' misreaction to specific information. I find a pervasive underreaction across topics in analysts' short-term earnings forecasts, while their overreaction in long-term forecasts is mainly significant for business operations, corporate management, and macroeconomic information. This pattern is consistent with a "story-statistics gap'' in associative memory being an important driver of overreaction to qualitative, story-like information. (3) I find that both asymmetric information and differences of opinion contribute to disagreement in earnings forecasts. Together, these results offer new insights into the formation of subjective beliefs about firms' earnings.
Does Fund Size Affect Private Equity Performance? Evidence from Donation Inflows to Private Universities
Abhishek Bhardwaj et al.
NBER Working Paper, March 2025
Abstract:
Do returns in private equity (PE) rise or fall with fund scale? This question is increasingly urgent amid larger funds and new focus on the retail market. Since better managers can raise larger funds, the causal effect is difficult to identify. We develop an instrument based on gifts to universities, which lead to more capital for managers with preexisting relationships. We show decreasing returns; for example, a 1% size increase reduces net IRR by 0.1 percentage points. Larger funds do larger deals, which perform worse. We find no change in risk, in part because additional deals are more levered.
'Invest!': Liberty Bonds and Stock Ownership over the Twentieth Century
Gillian Brunet, Eric Hilt & Matthew Jaremski
NBER Working Paper, March 2025
Abstract:
The Liberty Bond drives of World War I were nation-wide interventions aimed at increasing financial literacy and associating bond ownership with patriotism. Using data from the first year of the Survey of Consumer Finances, 1947, through 1971, we investigate whether exposure to the drives shaped investing behavior over the long run. We find that households residing in counties that had high Liberty Bond participation had greater stock and bond ownership rates in later decades, and held more favorable opinions towards retirement saving and stock investment. These effects are present only among cohorts actually exposed to the bond drives, and not among younger cohorts in the same counties, and are robust to an instrumental variables specification that takes advantage of differences in the way the bond drives were conducted. Our estimates imply that household stock ownership rates would have been about 20% lower in the late 1960s if the bond drives had not been conducted.
Trading in Twilight: Sleep, Mental Alertness, and Stock Market Trading
Hee Seo Han et al.
NBER Working Paper, February 2025
Abstract:
We test whether mental alertness, as proxied by sleep disruption, impairs investor trading performance. Using four complementary approaches, we document that retail investors who experience a later sunset time on average earn lower abnormal returns on their trades. These approaches include panel regression with household fixed effects, RDD based on time zone borders, comparison of different seasons and latitudes, and daylight saving changes. Further tests suggest that the sleep disruption effect derives from impaired investor attention.