Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets

The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.     

Proprietary Costs and the Disclosure of Information About Customers

In deciding how much information about their firms’ customers to disclose, managers face a trade off between the benefits of reducing information asymmetry with capital market participants and the costs of aiding competitors by revealing proprietary information. This paper investigates the determinants of managers’ choices to disclose information about their firms’ customers using a comprehensive data set of customer‐information disclosures over the period 1976–2006. We find robust evidence in support of the hypothesis that proprietary costs are an important factor in firms’ disclosure choices regarding information about large customers.     

Sovereign Debt Portfolios,Bond Risks,and the Credibility of Monetary Policy

We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively countercyclical inflation ex post, which leads risk-averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.     

The Financial Crisis from the Family's Perspective: Evidence from the 2007–2009 SCF Panel*

This paper examines changes in families' finances as captured in the 2007–2009 Survey of Consumer Finances panel. The broad contours of changes in families' assets, debts, and wealth align with changes in the corresponding aggregate measures, but the microdata from the panel highlight substantial variation in families' experiences between 2007 and 2009. Although more than 60% of families saw their wealth decline over the two‐year period, a sizable fraction experienced gains in wealth, while some families' financial situations saw little change on net. The shifts in wealth do not appear to be correlated in a simple way with families' characteristics. Instead, the patterns of mixed losses, gains, and modest shifts in wealth generally hold within groups defined by demographic characteristics or by 2007 wealth or income. On the whole, changes in wealth appear to stem from changes in asset values rather than from changes in portfolio composition or debt levels.     

Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts

This paper uses novel data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross‐section, firms owned by private equity funds average 40% smaller fleets than observably similar public firms. Similar fleet reductions are observed within firms that undergo leveraged buyouts. Quantile regressions indicate that these results are driven by firms in the upper 30% of the conditional jet distribution. The results thus suggest that executives in a substantial minority of public firms enjoy excessive perquisite and compensation packages.     

Local Currency Sovereign Risk

We introduce a new measure of emerging market sovereign credit risk: the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk‐free rate constructed using cross‐currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign‐currency‐denominated debt, local currency credit spreads have lower means, lower cross‐country correlations, and lower sensitivity to global risk factors. We discuss several major sources of credit spread differentials, including positively correlated credit and currency risk, selective default, capital controls, and various financial market frictions.