Household Optimism and Overborrowing

We use Finnish household‐level data from 1994 to 2013 to measure how often and what kind of forecast errors households make and how the errors are linked to the households' borrowing behavior and overindebtedness. We find that those households that make the largest optimistic forecast errors have greater debt‐to‐income ratios. They also are more likely to report that they suffer from excessive debt loads and have problems in coping with their bills. There are no such systematic effects for the households that make pessimistic forecast errors.     

Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap

Many policymakers and some theories hold that restricting access to expensive credit helps consumers by preventing overborrowing. I examine some effects of restricting access, using household panel survey data on payday loan users collected around the introduction of binding restrictions on payday loan terms in Oregon. Borrowing fell in Oregon relative to Washington, with former payday borrowers shifting partially into plausibly inferior substitutes: bank overdrafts and late bill payment. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of Oregon households. Overall the results are consistent with restricted access harming, not helping, consumers on average.     

Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays

The mortgage default decision is part of a complex household credit management problem. We examine how factors affecting mortgage default spill over to other credit markets. As home equity turns negative, homeowners default on mortgages and home equity lines of credit at higher rates, whereas they prioritize repaying credit cards and auto loans. Larger unused credit card limits intensify the preservation of credit cards over housing debt. Although mortgage nonrecourse statutes increase default on all types of housing debt, they reduce credit card defaults. Foreclosure delays increase default rates for housing and nonhousing debts. Our analysis highlights the interconnectedness of debt repayment decisions.     

Cultural influences on home bias and international diversification by institutional investors

We investigate determinants of international diversification in institutionally managed portfolios from more than 60 countries. Survey-based country-specific variables on cross-cultural behaviors help to explain both home bias and diversification among foreign equities. In particular, investment funds from countries characterized by higher uncertainty avoidance behavior display greater home bias and are less diversified in their foreign holdings. Portfolios from countries with higher levels of masculinity and long-term orientation display lower levels of home bias, and portfolios from countries with higher levels of masculinity are more diversified abroad. Portfolios from culturally distant countries invest less abroad and underweight culturally distant target markets. The economic significance of cultural variables is high and comparable in magnitude to geographical distance, a consistent influence on foreign diversification in prior studies. Culture impacts investor behavior directly and not merely though indirect channels such as legal and regulatory framework.     

Income hedging and portfolio decisions

We examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives. Economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases. Surprisingly, empirical studies find limited support for the income hedging motive. Using a rich, unique Dutch data set and the National Longitudinal Survey of the Youth (NLSY) from the United States, we show that when the income-return correlation is low, individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets. Even when the income risk is high, individuals exhibit a higher propensity to participate in the market when the hedging potential is high. These findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions.     

Household portfolio choices,health status and health care systems: A cross-country analysis based on SHARE

Health risk is increasingly viewed as an important form of background risk that affects household portfolio decisions. However, its role might be mediated by the presence of a protective full-coverage national health service that could reduce households’ probability of incurring current and future out-of-pocket medical expenditures. We use SHARE data to study the influence of current health status and future health risk on the decision to hold risky assets, across ten European countries with different health systems, each offering a different degree of protection against out-of-pocket medical expenditures. We find robust empirical evidence that perceived health status matters more than objective health status and, consistent with the theory of background risk, health risk affects portfolio choices only in countries with less protective health care systems. Furthermore, portfolio decisions consistent with background risk models are observed only with respect to middle-aged and highly-educated investors.     

Behavior of liquidity and returns around Canadian seasoned equity offerings

Spread costs and their adverse selection and temporary components for Canadian SEOs follow an approximate V-shaped pattern with a trough at the closing window. Enhanced ownership diffusion partly explains the decrease in these spread costs post-SEO completion versus pre-SEO announcement. SEO spread costs decrease after the April 1996 TSX decimalization. The adverse selection cost of privately-placed Canadian SEOs decreases after Multilateral Instrument 45-102 reduced the lock-up period to four months in 2001. Consistent with results for non-US SEOs, negative abnormal returns (ARs) occur in announcement windows for undifferentiated SEOs. ARs are significantly different for public (significantly negative) versus private (insignificantly positive) SEOs consistent with their associated differential reductions in information asymmetry. Conditional residual volatilities decrease post-announcement, consistent with a diminished temporary spread cost and expected behavior following an unanticipated event.     

Sentiment and stock prices: The case of aviation disasters

Behavioral economic studies reveal that negative sentiment driven by bad mood and anxiety affects investment decisions and may hence affect asset pricing. In this study we examine the effect of aviation disasters on stock prices. We find evidence of a significant negative event effect with an average market loss of more than $60 billion per aviation disaster, whereas the estimated actual loss is no more than $1 billion. In two days a price reversal occurs. We find the effect to be greater in small and riskier stocks and in firms belonging to less stable industries. This event effect is also accompanied by an increase in the perceived risk: implied volatility increases after aviation disasters without an increase in actual volatility.     

The impact of consumer behavior on financial security of households in Poland

The paper applies the concept of identity to investigate whether consumer behavior matters for a household's financial security. It is assumed that considerable part of households may express their identity through status-oriented consumption. The research is carried out in two steps. First, the index of financial security is built and used to determine the level of financial security experienced by working-age families in Poland. Second, the simulation results based on an econometric model are employed to find the answer to the question: Does financial insecurity result more from the need to manifest consumption at the higher level than average in an income-group of which people are members, or people want to be distinguishable inside their own income-group but they do not identify with a group having consumption at visibly higher level, or from the need to improve self-image by bringing own consumption closer to the pattern of a group with higher wealth status of which they are not members? The source of data is the 2005-2009 Households Budget Surveys in Poland. The findings offer empirical evidence for the relevance of consumer behavior for financial security of households in Poland. Considerable part of households expresses identity through conspicuous consumption. Both groups of households, the insecurity rich and the insecurity poor, accept the same ranking of status goods: a car on the first position, next homes (housing and equipment) and clothes on the third place. Status-oriented consumption creates life beyond means and pushes even relatively rich households towards financial insecurity.     

A SPECIALIST'S QUOTED DEPTH AS A STRATEGIC CHOICE VARIABLE: AN APPLICATION TO SPREAD DECOMPOSITION MODELS

Although there is a sizable literature demonstrating that liquidity and transaction costs are multidimensional, researchers continue to estimate adverse‐selection costs using only prices. We present a model of a profit‐maximizing specialist who posts prices and depths. The model is simulated to measure changes in the adverse‐selection component of the spread that result under different levels of informed trading. We find that spread decompositions fail to capture the full extent of adverse‐selection risk when specialists choose depth. We recommend that researchers use adverse‐selection measures that account for depth as well as spread to mitigate this problem.     

THE FUNDAMENTAL DETERMINANTS OF TRADING VOLUME REACTION TO FINANCIAL INFORMATION: EVIDENCE AND IMPLICATIONS FOR EMPIRICAL CAPITAL MARKET RESEARCH

Prior empirical research indicates that trading volume reaction to new information increases with the heterogeneity of investors’ prior beliefs. We examine three potential factors that theoretical models of financial economists show determine trading volume reaction to new information: heterogeneous prior beliefs, differential interpretation, and the consensus effect—the extent to which the information causes their beliefs to converge or diverge. We find that these three factors have a distinct and significant incremental effect on trading volume, thereby suggesting that empirical trading volume models that exclude or fail to control for any of these determinants are misspecified with biased estimated coefficients.     

Earnings conference calls and stock returns: The incremental informativeness of textual tone

Quarterly earnings conference calls are becoming a more pervasive tool for corporate disclosure. However, the extent to which the market embeds information contained in the tone (i.e. sentiment) of conference call wording is unknown. Using computer aided content analysis, we examine the incremental informativeness of quarterly earnings conference calls and the corresponding market reaction. We find that conference call linguistic tone is a significant predictor of abnormal returns and trading volume. Furthermore, conference call tone dominates earnings surprises over the 60 trading days following the call. The question and answer portion of the call has incremental explanatory power for the post-earnings-announcement drift and this significance is primarily concentrated in firms that do not pay dividends, illustrating differences in investor behavior based on the level of cash flow uncertainty. Additionally, we find that a context specific linguistic dictionary is more powerful than a more widely used general dictionary (Harvard IV-4 Psychosocial).     

Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads

We study the dynamic impact of idiosyncratic volatility and bond liquidity on corporate bond spreads over time and empirically disentangle both effects. Using an extensive data set, we find that both idiosyncratic volatility and liquidity are critical mainly for the distress portfolios, i.e., low-rated and short-term bonds; for others only volatility matters. The effects of volatility and liquidity shocks on bond spreads were both exacerbated during the recent financial crisis. Liquidity shocks are quickly absorbed into bonds prices; however, volatility shocks are more persistent and have a long-term effect. Our results overall suggest significant differences between how volatility and liquidity dynamically impact bond spreads.     

The Operating Performance of Firms that Switch Their Stock Listings

In this article we examine the operating performance of stocks that switch from NASDAQ to the American Stock Exchange (AMEX) or the New Stock Exchange (NYSE) and from AMEX to the NYSE. Specifically, we investigate whether post‐listing operating performance is consistent with the reported negative long‐term drift of post‐listing stock returns and whether there is evidence of self‐selection of the listing time. We find evidence of negative post‐listing changes in operating return on assets and sales, which, on a match‐adjusted basis, are significant for the relatively small NASDAQ stocks switching to AMEX. We also find evidence that firms self‐select the time of listing changes.     

Determinants of collateral

We estimate a comprehensive model of the determinants of collateral in loans extended to business firms. We use a panel data on a sample of bank loans to Spanish firms from 1984 to 2002. Consistent with theories that view collateral as a solution to adverse selection problems, our results provide direct evidence of a negative association between collateral and a borrower's risk. We also present evidence on previously unexplored determinants of collateral such as credit market competition, lender type, and the business cycle.     

The Nasdaq-Amex Merger, Nasdaq Reforms, and the Liquidity of Small Firms

After the Nasdaq and American Stock Exchange (AMEX) merged in 1998, officials of the new entity argued that some “smaller, harder to trade” companies on Nasdaq should switch to AMEX to improve liquidity. This recommendation is based on the traditional view among academics and practitioners alike that a substantial trading cost reduction should be realized when a company switches from the multidealer Nasdaq system to the AMEX specialist system. However, in light of the 1997 Nasdaq reforms, we reexamine the validity of these arguments using data from 1996–98 on firms that switch from the Nasdaq to the AMEX or the New York Stock Exchange. Evidence from transaction costs, volatility, and stock returns shows declining benefits to switching during the sample period. Our findings indicate that the liquidity improvement from exchange listing is limited in the wake of the Nasdaq reforms of 1997.     

中国居民储蓄率的特征事实及其政策含义

本文使用资金流量表数据探讨了中国国民储蓄的部门特征以及居民储蓄在其中的地位及其变化、研究显示：1978年以来。中国居民储蓄率总体上呈现出明显的上升趋势,其中在上世纪90年代的增速最快．而在2000年以后一直保持在较高水平：并且中国的居民储蓄率明显高于世界主要发达国家和转型经济国家的同期水平;从国民储蓄的部门特征来看：居民储蓄始终是国民储蓄中最重要且稳定的组成部分,进一步的分析显示．近年来居民部门的收入占比呈现出较大幅度的下降,但居民储蓄倾向却增长明显,从而导致居民部门储蓄率的基本稳定。文章最后提出了相关的政策建议．     

Research for sale: Determinants and consequences of paid-for analyst research

I examine the determinants and market impact of paid-for coverage using a hand-collected sample of paid-for reports over 1999–2006. More than five hundred publicly listed US companies paid for analyst coverage since 1999. Yet little is known about the informational consequences of this analyst research. Firms with greater uncertainty, weaker information environments, and low turnover are more likely to buy coverage as they have the most to gain from analyst coverage but are unlikely to attract sell-side analysts. Despite the inherent conflicts of interest, I find paid-for reports have information content for investors based on 2-day abnormal returns. After the initiation of coverage, companies experience an increase in institutional ownership, sell-side analyst following, and liquidity. In addition, the results are strongest for the fee-based research firm with ex ante policies that reduce potential conflicts of interest.     

Increasing Support for Those on Lower Incomes: Is the Saving Gateway the Best Policy Response?

The government is committed to introducing a new savings account for people on lower incomes. This will provide a strong incentive for eligible individuals to save, or at least to hold financial assets, in these accounts. This paper describes possible rationales for this government intervention. It then presents new evidence on the characteristics of people with lower incomes and finds that many already have some financial assets, while those who do not often appear to have good reasons for why they may not want to be currently saving. The result is that the proposed Saving Gateway will be extremely difficult to target at those who might benefit in the way the government hopes. The danger is that the policy will be expensive relative to the number of genuine new savers and savings that it generates.