How much is enough? An investigation of nonprofessional investors information search and stopping rule use

Regulators are concerned that the information overload in the current Internet-based disclosure environment may cause investors to overlook important information. To gain a better understanding of the information set gathered by investors, this study incorporates theories from information systems research to examine the cognitive stopping rules used by investors to terminate information search. We survey nonprofessional investors to gain insight into what information they gather and when they determine they have enough information to stop searching and make an investment decision. Demographic analysis shows that investor characteristics are associated with the particular stopping rule used. In addition, results show that the stopping rule used affects the amount and type of information gathered. We find that, in general, investors include very little financial information in their search, and the amount gathered depends on the stopping rule employed. Our results call into question the decision usefulness of accounting information for nonprofessional investors and should be of interest to accounting information systems researchers, regulators, and accounting practitioners.     

How much is reasonable? The size of termination fees in mergers and acquisitions

We investigate termination fee size in mergers. Although the deal premium does not significantly affect fee size, smaller targets and targets with lower institutional ownership offer larger fees. Low or moderate fees do not eliminate post-announcement competing bids, while large fees do. Fee size is generally positively correlated with deal completion. However, large fees are negatively correlated with the consummation of high-premium deals. Fee size is generally unrelated to announcement-date cumulative abnormal returns. However, returns are significantly lower for deals including fees larger than 5%. Overall, the study provides evidence that low- or moderate-size fees serve as efficient contractual devices, while large fees are less beneficial to shareholders and therefore tend to suggest agency conflicts.     

How valuable is word of mouth?

The customers who buy the most from you are probably not your best marketers. What's more, your best marketers may be worth far more to your company than your most enthusiastic consumers. Those are the conclusions of professors Kumar and Petersen at the University of Connecticut and professor Leone at Ohio State University, who analyzed thousands of customers in research focused on a telecommunications company and a financial services firm. In this article, the authors present a straightforward tool that can be used to calculate both customer lifetime value (CLV), the worth of your customers' purchases, and customer referral value (CRV), the value of their referrals. Knowing both enables you to segment your customers into four constituent parts: those that buy a lot but are poor marketers (which they term Affluents); those that don't buy much but are very strong salespeople for your firm (Advocates); those that do both well (Champions); and those that do neither well (Misers). In a series of one-year experiments, the authors demonstrated the effectiveness of this segmentation approach. Offering purchasing incentives to Advocates, referral incentives to Affluents, and both to Misers, they were able to move significant proportions of all three into the Champions category. Both companies reaped returns on their marketing investments greater than 12-fold--more than double the normal marketing ROI for their industries. The power of this tool is its ability to help marketers decide where to focus their efforts. Rather than waste funds encouraging big spenders to spend slightly more while overlooking the power of customer evangelists who don't buy enough to seem important, you can reap much higher rewards by nudging big spenders to make referrals and urging enthusiastic proponents of your wares to buy a bit more.     

How biased is the behavior of the individual investor in warrants?

Based on the actual trading behavior of individual investors in the Portuguese financial market during almost ten years this paper examines the socio-demographic characteristics of retail investors in warrants, and discusses the hypothesis that some behavioral biases do have an impact on the investors’ predisposition to invest and trade in warrants, a complex financial instrument. One finds that there is a profile of investors in warrants: younger and less educated men are more likely to invest in warrants and that overconfident, disposition-prone and investors exhibiting a gambling attitude are more likely to invest and trade in warrants. Secondly, the gambling motive seems to be a distinguishing characteristic of investors in warrants. In other words, when investors are driven to trade in financial markets for pleasure/fun they tend to trade complex products more and to trade simple and easier to understand financial instruments less. Finally, the higher the intensity of trading the more relevant are the disposition and the gambler’s biases.     

How and when is dual trading irrelevant?

Within a general model of speculative trade, we derive the aggregate consequences of dual traders who process retail liquidity trades and trade on their own account. We prove that dual trading reduces total expected speculator profits unless speculators process all liquidity trade and trade with the same intensity on liquidity trade. In contrast, dual trading does not affect the information content of prices. We show how results generalize when we endogenize (a) speculator information via costly information acquisition about fundamentals or costly processing of liquidity trade, and (b) liquidity trader motives and welfare via endowment shocks.     

How far have the frontiers of the state been rolled back between 1979 and 1987?

The Conservative Government came to power in 1979, with the general aim of reducing the role of the public sector. One measure of their success or failure is the extent to which the public estate ‐ the financial and physical assets which go to make it up ‐ have been reduced or transferred to the private sector. Against that standard their record falls far short of what the rhetoric appeared to promise, and their opponents feared ‐ a wholesale dismantling of the State.     

How do banks price liquidity? The role of market power.

We empirically examine the effects of different measures of liquidity on interest margins of a sample of U.S. commercial banks from 2001 to 2018. Overall, the results reveal that liquidity ratios exert a positive influence on bank margins. Furthermore, the study investigates the role of market power in the relationship between liquidity and interest margins. It is documented that dominant banks incorporate the costs associated with investing in liquidity into the bank margins to a lesser extent than banks with less market power, suggesting that the cost of complying with regulatory liquidity standards is reduced when the competition in the banking sector is less intense. The study highlights that market competition might be important in the design and implementation of liquidity regulations.     

Participant‐focused analysis: explanatory power of the classic psychometric paradigm in risk perception

Typical psychometric paradigm factors appear to have greater explanatory power for individual participants than previously envisaged. It is possible to acquire interpretable information about single participants using two factors (catastrophic potential and social and personal exposure) from aggregated participant‐focused data. Our results suggest that the classical psychometric model originated by Fischhoff and Slovic in the early 1980s to explain differences among hazards may also be capable of accounting for differences among participants. While socio‐demographic conditions on their own do not have substantial explanatory power, they are statistically significant and appear to dictate the position of participants within the factor space obtained using a participant‐focused analysis. One of the principal criticisms of the psychometric paradigm has been its lack of interpretability when using disaggregated data, but incorporating socio‐demographic variables overcomes this limitation.     

What is Community Based Auditing and how does it work?

Community Based Auditing (CBA) has arisen in response to the ongoing conflict over the management of Tasmania's natural resources and in particular publically owned forests and water resource. The origins, philosophy and central methodology of Community Based Auditing are described and discussed. The author discusses how melding the principles of Post-Normal Science with methods of action research and environmental auditing has led to an innovative form of community engagement where empowered citizens undertake disciplined inquiry into issues relating to natural resource planning and management. Of particular concern are the notions of certainty embedded in present frameworks underpinning government legislation, natural resource planning and management. It is believed that this has led to a pattern of decision-making that is inappropriate, unfair and ultimately counterproductive. Case examples are presented where citizens have applied the CBA methodology in dealing with contentious issues within the Tasmanian forestry industry. The author concludes that the CBA innovation has helped to improve the depth and quality of citizen involvement in natural resource management and at the same time provides the impetus for greater accountability on the part of those charged with managing Tasmania's natural resources. It is felt that the methodology may be able to be applied to other contexts where the need for greater inclusiveness in decision-making relating to natural resource management has been demonstrated. The consequences for the evolution of environmental activism are also thought to be significant as a new form of community-based activism is now possible.     

How is illiquidity priced in the Chinese stock market?

This study investigates the liquidity premium in the Chinese stock market. We found that the expected stock returns increase monotonically with the quintile sort on characteristic liquidity with descending patterns. The characteristic liquidity premium ranges from 0.82% to 1.28% per month, which is much higher than that of their US counterparts. Moreover, our multivariate decomposition approach highlights that characteristic illiquidity premiums can be explained mainly by size, idiosyncratic volatility and momentum. The net systematic liquidity premium reaches 0.84% per month, driven mainly by commonality beta. The finding shows that a liquidity-based strategy forecasts cross-section and time-series expected returns.     

Voice and power: Do institutional shareholders make use of their voting power?

I investigate the role of voting power – the ability to influence a vote's outcome – in the voting behavior of institutional shareholders. Using hand-collected data from Israel, an environment with concentrated ownership, I employ a power index borrowed from the political science literature to examine the voting power wielded by institutional shareholders and the voting patterns they display. I find that institutional shareholders' voting power is negatively related to their tendency to vote against management: the stronger the shareholder, the higher the probability they will vote in favor of a management-sponsored proposal. Based on evidence obtained here, this behavior is attributable to pre-vote negotiations as well as to the voting strategy of “counting on my vote not counting.” Next, I use detailed data on shareholders' votes to identify the channel through which a voting rule affects minority shareholder protection. I find that powerful institutional shareholders almost never use their voting power to vote against management, not even when signals of poor governance are discernible. I conclude that the effect of a voting rule on minority shareholder protection operates through proposal selection, rather than through direct voting.     

What's in a frame? Social organization,risk perception and the sociology of knowledge

A central problem in the sociology of knowledge has been to show that sane people can intelligibly have quite different alternative understandings of the same problem, such as a kind of risk, without abandoning the idea that there is a real problem about which to disagree, and to show the social basis of both plurality and viability. In recent decades, attempts to make this problem tractable have focused on the idea of a ‘frame’. Theories of frames offer accounts of the range of content, as distinguished from theories of processes of diffusion, of which risk amplification theory is the best known example. In this article, several theories of frames – those of Goffman, D'Andrade, Moscovici, Gamson, Schön and Rein, and of prospect theory – found are to be inadequate, because of their lack of clarity and plausibility in their answers to four key questions: ‘what is the relationship between sense‐making and bias?’, ‘how are frames to be individuated?’, ‘where do frames come from?’, and ‘how far and how can people move between frames?’. The article makes the case for a neo‐Durkheimian institutional theory developed by Douglas and others. This approach derives frames as concrete applications to specific contexts from thought styles, which are in turn the product of solidarities or institutional styles of social organization, because it can offer clear, testable, parsimonious hypotheses with which to answer these four questions. The theory therefore provides an account of the institutional logic of framing, and presents reasons for preferring this to non‐institutional approaches such as the various kinds of cognitivism. The article offers three conceptual innovations with which to develop the neo‐Durkheimian theory, in order better to deal with the crucial fourth question about the scope for mobility between frames. These innovations and some specific hypotheses about the scope for mobility between frames are supported by consideration of some exploratory qualitative empirical research on privacy risk perception. The theory provides a more satisfactory strategy for tackling the core problem than most others, by showing plurality to be limited, by showing clear and specific social bases for plurality of frames, by neither wholly endorsing nor wholly rejecting any basic bias, and by showing that their conflictual and systemic interdependence is what makes for viability.     

Who is afraid of the Ebola outbreak? The influence of discrete emotions on risk perception

The appraisal tendency framework (ATF) suggests that discrete emotions mediate the relationship between cognitive appraisals and behaviors. Based on the ATF, this study analyzed and found that fear, anger, anxiety, disgust, and sadness were positively related to the US public’s risk perception about the Ebola outbreak. Fear was also found to inhibit the degree to which systematic processing of the relevant risk information influenced participants’ support for institutional mitigation measures such as sending more health professionals to help countries in West Africa deal with the Ebola outbreak. The result partially confirms the ATF and offers important practical implications in regard to the communication of emergent public health crises.     

How Different Is the Efficiency of Public and Private Water Companies in Asia?

Several studies have compared the efficiency of publicly andprivately owned water utilities and reached conflicting conclusionson the impact of ownership on efficiency. This article providesfurther evidence by estimating a stochastic cost frontier fora sample of Asian and Pacific regional water companies. Theresults show that efficiency is not significantly differentin private companies than in public ones.     

How local is local? Evidence from bank competition and corporate innovation in U.S.

Review of Quantitative Finance and Accounting - This paper aims to fill in a research gap in the effects of bank competition on corporate innovation. In addition to the evidence on the favorable...     

How important is intra-household risk sharing for savings and labor supply?

While it is recognized that the family is a risk-sharing institution, little is known about the quantitative effects of this source of insurance on savings and labor supply. In this paper, we present a model where workers (females and males) are subject to idiosyncratic employment risk and where capital markets are incomplete. A household is formed by a female and a male, who decide on consumption, savings and labor supplies. In a calibrated version of our model we find that intra-household risk sharing has its largest impact among wealth-poor households. While the wealth-rich use mainly savings to smooth consumption across unemployment spells, wealth-poor households rely on spousal labor supply. For instance, for low-wealth households, average hours worked by wives of unemployed husbands are 8% higher than those worked by wives of employed husbands. This response in wives’ hours makes up 9% of lost family income. We also study consumption losses upon an unemployment spell, precautionary savings and the crowding out effects of the public unemployment insurance program on the extent of risk sharing within the household.     

State uncertainty in stock markets: How big is the impact on the cost of equity?

We propose a novel Bayesian framework to incorporate uncertainty about the state of the market. Among others, one advantage of the framework is the ability to model a large collection of time-varying parameters simultaneously. When we apply the framework to estimate the cost of equity we find economically significant effects of state uncertainty. A state-independent pricing model overestimates the cost of equity by about 4% per annum for a utility firm and by as much as 3% for industries. We also observe that the expected return, volatility, risk loading, and pricing error all display state-dependent dynamics that coincide with the business cycle. More interestingly, the forecasted market and Fama–French factor risk premiums can predict the future real GDP growth rate even though the model does not use any macroeconomic variables, which suggests that the proposed Bayesian framework captures the state-dependent dynamics well.     

What is the role of legal systems in financial intermediation? Theory and evidence

We develop a theory’ and empirical test of how the legal system affects the relationship between venture capitalists and entrepreneurs. The theory uses a double moral hazard framework to show how optimal contracts and investor actions depend on the quality of the legal system. The empirical evidence is based on a sample of European venture capital deals. The main results are that with better legal protection, investors give more non-contractible support and demand more downside protection. These predictions are supported by the empirical analysis. Using a new empirical approach of comparing two sets of fixed-effect regressions, we also find that the investor’s legal system is more important than that of the company in determining investor behavior.