Sell‐Side School Ties

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational background of sell‐side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre‐Reg FD, this school‐tie return premium is 9.36% per year, while post‐Reg FD it is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the school‐tie premium is large and significant over the entire sample period.     

Colston E. Warne Lecture: Is It Time for Another Round of Consumer Protection? The Lessons of Twentieth-Century U.S. History

The first year of Barack Obama's presidency has returned consumer issues to center stage, with several contentious struggles over consumer protection. This moment can be viewed as a fourth wave of the twentieth-century consumer movement, and a comparison with the first three waves (during the Progressive Era, the New Deal, and the 1960s–1970s) offers instructive insights. In particular, the contemporary battle over the Consumer Financial Protection Agency bears striking similarities to the failed campaign for a Consumer Protection Agency in the 1970s.     

ASSESSING THE IMPACT OF RETAILER STORE BRAND PRESENCE ON MANUFACTURER BRANDS IN AN EQUILIBRIUM FRAMEWORK*

This article assesses the impact of retailer store brand products on manufacturer brand prices, profitability and consumer welfare in Boston's white fluid milk market. Estimates from a random coefficients logit demand model are used to specify and test a set of pricing games. Under the selected model, milk manufacturers are Stackelberg leaders to retailers, and store brand milks are procured by retailers at cost. The model is used to investigate counterfactual markets without retailer store brand milks. Counterfactual Simulation results indicate that store brands increase channel profits, retailer profits and consumer welfare, while having mixed effects on equilibrium retail prices.     

Economic Links and Predictable Returns

This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. Using a data set of firms' principal customers to identify a set of economically related firms, we show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long–short equity strategy based on this effect yields monthly alphas of over 150 basis points.     

Supply and Demand Shifts in the Shorting Market

Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.     

Bank Earnings Management and Tail Risk during the Financial Crisis

We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. Banks demonstrating more aggressive earnings management prior to 2007 exhibit substantially higher stock market risk once the financial crisis begins as measured by the incidence of large weekly stock price “crashes” as well as by the pattern of full‐year returns. Stock price crashes also predict future deterioration in operating performance. Bank regulators may therefore interpret them as early warning signs of impending problems.     

Decoding Inside Information

Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable “routine” insider trading that is not informative about firms’ futures. A portfolio strategy that focuses solely on the remaining “opportunistic” traders yields value‐weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.     

Improving performance through cost allocation*

Abstract. This paper considers an intrafirm resource allocation model with a single principal and n agents. Each agent represents a division manager who uses a centrally provided input together with other inputs, including effort, to produce and sell final products. The principal represents an owner who is responsible for providing an input to the divisions. It is assumed that each agent (division manager) knows the local profit function for the division and has disutility for effort. The principal seeks to maximize firm-wide profits net of the costs of the centrally provided input and compensation to the agents. In this setting, which incorporates divergence of preferences and asymmetric information, it is shown that the principal and the n agents can strictly improve their welfare by moving from a set of compensation functions that do not include any allocation of costs to compensation functions that are based on cost allocation. Résumé. Les auteurs se penchent sur un modèle de répartition des ressources intraentreprise en présence d'un seul mandant et de n mandataires. Chaque mandataire représente un directeur de division qui utilise un intrant, fourni par l'échelon central, en conjonction avec d'autres intrants, y inclus l'effort, pour fabriquer et vendre des produits finis. Le mandant représente un propriétaire à qui incombe la responsabilité de fournir un intrant aux divisions. L'on suppose que chaque mandataire (directeur de division) connaît la fonction de profit de sa division et a l'effort en aversion. Le mandant cherche à maximiser les profits globaux de l'entreprise, compte tenu des coûts de l'intrant fourni par l'échelon central et de la rémunération des mandataires. Dans cette situation, qui fait intervenir des préférences divergentes et de l'information asymétrique, l'on démontre que le mandant et les n mandataires peuvent strictement améliorer leur situation en passant d'un ensemble de fonctions de rémunération qui ne prévoient aucune ventilation des coûts à des fonctions de rémunération basées sur la ventilation des coûts.