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Publications
In-group bias on financial markets.
with Alok Kumar, Sima Jannati, and Justin Wolfers
Management Science, forthcoming
Abstract: Using gender to identify analyst groups, we examine whether in-group bias affects the behavior of sell-side equity analysts and the information dissemination process. We find that analysts hold more optimistic and less accurate earnings expectations for firms with same-gender CEOs, where in-group bias is stronger among men. Greater exposure to out-of-group individuals weakens in-group bias, and the bias is also weaker among analysts located in U.S. states with greater gender equality. Group definitions based on race/ethnicity and name similarity yield similar results. These findings are robust and unlikely to reflect selective information access or various selection effects.
The Long-Lasting Effects of Living Under Communism on Attitudes Towards Financial Markets
with Christine Laudenbach and Ulrike Malmendier
Journal of Finance, forthcoming.
Abstract: We show that exposure to anti-capitalist ideology can exert a lasting influence on attitudes towards capital markets and stock-market participation. Utilizing novel survey, bank, and broker data, we document that, decades after Germany's reunification, East Germans invest significantly less in stocks and hold more negative views on capital markets. Effects vary by personal experience under communism. Results are strongest for individuals remembering life in the German Democratic Republic positively, e.g., because of local Olympic champions or living in a ``showcase city''. Results reverse for those with negative experiences like religious oppression, environmental pollution, or lack of Western TV entertainment.
Race, Police Violence, and Financial Decision-Making
with Vicki L. Bogan, Lisa A. Kramer, and Chi Liao
American Economic Journal: Papers & Proceedings, forthcoming.
Abstract: We find an economically and statistically significant effect of race-based police violence on home ownership and retirement savings. Using restricted-use Panel Study of Income Dynamics data, we show that Black individuals exposed to the fatality of a Black person caused by or involving police subsequently experience decreased home ownership, home equity, and defined contribution pension participation relative to non-Black households in the same zip code. Our findings suggest that race-based violence affects not only those immediately involved, but also entire racial communities in the vicinity. These decreases in illiquid assets imply negative long-term consequences for Black households’ wealth accumulation.
Stock Repurchasing Bias of Mutual Funds
with Mengqiao Du, Terrance Odean
Review of Finance, forthcoming.
Abstract: This article shows that mutual funds’ trading experiences bias their future repurchasing decisions. Mutual funds are less likely to repurchase a stock if they previously sold the stock for a loss rather than for a gain. After switching to managing a different fund, fund managers still avoid repurchasing stocks they sold for a loss at a past fund. We do not find that mutual fund managers are biased against repurchasing past loser stocks because of superior information. Though less likely to be repurchased, repurchased losers do not underperform repurchased winners—and the fund itself—in the subsequent quarter.
Data and Replication Package can be found
here.
Mutual Fund Shareholder Letters: Flows, Performance, and Managerial Behavior
with Alexander Hillert, Stefan Ruenzi
Management Science, forthcoming.
Abstract: Fund companies regularly send shareholder letters to their investors. We use textual analysis to investigate whether these letters’ writing style influences fund flows and whether it predicts performance and investment styles. Fund investors react to the tone and content of shareholder letters: A less negative tone leads to higher net flows. Thus, fund companies can use shareholder letters as a tactical instrument to influence flows. However, at the same time, a dishonest communication that is not consistent with the fund’s actual performance decreases flows. A positive writing style predicts higher idiosyncratic risk as well as more style bets, while there is no consistent predictive power for future performance.
Data and Replication Package can be found here.
The Impact of Role Models on Women's Self-Selection in Competitive Environments
with Kristina Meier and Stefan Ruenzi
Quarterly Journal of Finance, forthcoming.
Abstract: We show that competitive female role models reduce women's perceived stereotype threat and increase their willingness to compete. Competitive male role models have the opposite effect. They seem to discourage women from competing and, as a result, the gender gap in tournament entry increases. Results are strongest for the best performing women who would benefit most from competing. Role models have no impact on low performing women, and on men.
Do Counter-Stereotypical Female Role Models Impact Women's Occupational Choices?
with Vidhi Chhaochharia, Mengqiao Du
Journal of Economic Behavior & Organization, Vol. 196, 501 -523, 2022
Abstract: This paper examines the relation between counter-stereotypical female role models and women's labor supply and occupational choices. Using hand-collected data from Gallup surveys that cover more than 50 years, we create a direct measure of counter-stereotypical female role models based on the fraction of local survey respondents who state that they admire famous women in business, politics, or science. We show that admiring counter-stereotypical female role models is associated with more women participating in the labor market, working in male-dominated and STEM industries, and taking managerial positions, which eventually alleviates the gender pay gap.
with Jawad M. Addoum, Jawad M. Addoum, Alok Kumar, Nhan Le
Review of Finance, Vol. 24, Issue 5, 997–1037, 2020
Abstract: This paper examines whether corporate bankruptcies influence the bank loan characteristics of geographically proximate firms. We find that, controlling for industry contagion and local economic conditions, firms headquartered near a bankruptcy event experience a 7 basis point increase in loan spreads over the subsequent year, even when the credit default risks of local firms do not increase. There is also an increase in the proportion of secured loans among non-filing local firms. Local bankruptcy has a stronger impact among lenders with geographically concentrated loan portfolios, but even lenders with low exposure to the local economy increase their spreads. The adverse effects of bankruptcy weaken as borrowers' distance to bankrupt firms increases. Collectively, these results suggest that lenders are sensitive to local bankruptcies and induce geographic contagion in the bank loan market.
Emotional Tagging and Belief Formation – The Long-lasting Effects of Experiencing Communism.
with Christine Laudenbach, Ulrike Malmendier
AEA Papers and Proceedings, 109, 567–71, 2019
Abstract: Growing evidence in macrofinance suggests long-lasting effects of personally experienced outcomes on beliefs. To understand the underlying mechanism we turn to the neurological foundations of memory formation. We propose that emotional tagging plays a crucial role in assigning weights in the belief formation process. We use exposure to communism as well as variation in its emotional tagging to predict long-run beliefs. We show that living under communism has long-term effects on beliefs about its benefits. In addition, positive and negative emotional tags strongly affect the (pro- or anti-communist) direction of beliefs, providing anchors to memory that seem hard to reverse.
Do direct cash payments increase whole blood supply?
with David M. Becker, Harald Klüter, Martin Weber
German Economic Review, Vol. 20, No. 4, 973-1001, 2019
Abstract: We investigate the impact of direct cash payments on whole blood donations. The German blood collection system is based on both, paid and unpaid blood donations. We take advantage of a quasi-natural experiment, in which one blood donation site changes its compensation scheme from paid to unpaid, while all other donation sites maintain their payment schemes. We show that cash payments increase donation volume without affecting blood quality. This result casts doubt on the notion that monetary incentives crowd out intrinsic motivation to donate blood. Policymakers should thus reconsider direct cash payments to address public health concerns about blood shortages.
Sex matters: Gender bias in the mutual fund industry.
with Stefan Ruenzi
Management Science, Vol. 65, No.7, 2947-3448, 2019
Abstract: We document significantly lower inflows in female-managed funds than in male-managed funds. This result is obtained with field data and with data from a laboratory experiment. We find no gender differences in performance. Thus, rational statistical discrimination is unlikely to explain the fund flow effect. We conduct an implicit association test and find that subjects with stronger gender bias according to this test invest significantly less in female-managed funds. Our results suggest that gender bias affects investment decisions and thus offer a new potential explanation for the low fraction of women in the mutual fund industry
The impact of firm prestige on executive compensation.
with Florens Focke, Ernst Maug
Journal of Financial Economics, 123, 313–336, 2017
Abstract: We show that chief executive officers (CEOs) of prestigious firms earn less. Total compensation is on average 8% lower for firms listed in Fortune’s ranking of America’s most admired companies. We suggest that CEOs are willing to trade off status and career benefits from working for a publicly admired company against additional monetary compensation. Our identification strategy is based on matched sample analyses, difference-in-differences regressions, and a regression discontinuity design. We perform several robustness checks and exclude many alternative explanations, including that firm prestige just proxies for better corporate governance or for increased exposure of the pay-setting process to media attention.
What is in a name? Mutual fund flows when managers have foreign-sounding names.
with Alok Kumar, Oliver Spalt
Review of Financial Studies, 28, 2281-2321, 2015
Abstract: We show that name-induced stereotypes affect the investment choices of U.S. mutual fund investors. Managers with foreign-sounding names have about 10% lower annual fund flows, and this effect is stronger among funds with investor clienteles more likely to be suspicious of foreigners. Foreign-named managers experience lower appreciation (greater decline) in flows following good (bad) performance. Following 9/11, flows to funds with managers with Middle-Eastern-sounding names declined abnormally. In an experimental setting in which skill differences are absent, individuals allocate 11% less money to an index fund managed by a foreign-named manager. This gap widens following the Boston marathon bombings.
Low Risk and High Return – Affective Attitudes and Stock Market Expectations.
with Alexander Kempf, Christoph Merkle
European Financial Management, 20, 995-1030, 2014
Abstract: This experimental study investigates the impact of affective attitudes on risk and return estimates of stocks. Participants rate well-known blue-chip firms on an affective scale and forecast risk and return of the firms’ stock. We find that positive affective attitudes lead to a prediction of high return and low risk, while negative attitudes lead to a prediction of low return and high risk. This bias increases with participants’ confidence in their ratings and decreases with financial literacy. Firm characteristics such as a firm's marketing expenditures and the strength of its brand have a positive impact on its affective rating.
weiter rübergggggggggggg ggg | Local Investors and Corporate Governance.
with Vidhi Chhaochharia, Alok Kumar
Journal of Accounting & Economics, 54, 42–67, 2012
Abstract: This paper shows that local institutional investors are effective monitors of corporate behavior. Firms with high local ownership have better internal governance and are more profitable. These firms are also less likely to manage their earnings aggressively or backdate options and are less likely to be targets of class action lawsuits. Further, managers of such firms exhibit a lower propensity to engage in “empire building” and are less likely to “lead the quiet life”. Examining the local monitoring mechanisms, we find that local institutions are more likely to introduce shareholder proposals, increase CEO turnover, and reduce excess CEO pay.
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Public Opinion and Executive Compensation
with Camelia M. Kuhnen
Management Science, 58, 1249-1272, 2012
Abstract: We investigate whether public opinion influences the level and structure of executive compensation. During 1992–2008, the negativity of press coverage of chief executive officer (CEO) pay varied significantly, with stock options being the most criticized pay component. We find that after more negative press coverage of CEO pay, firms reduce option grants and increase less contentious types of pay such as salary, although overall compensation does not change. The reduction in option pay after increased press negativity is more pronounced when firms, CEOs, and boards have stronger reputation concerns. Our within-firm, within-year identification shows the results cannot be explained by annual changes in accounting rules regarding executive compensation, stock market conditions, or pay mean reversion.
The Impact of Investor Sentiment on the German Stock Market.
with European Retail Investment Conference, Stefan Ruenzi, Philipp Finter
Zeitschrift für Betriebswirtschaft, 82, 133–163, 2012
Abstract: This paper develops a broad-based sentiment indicator for Germany and investigates whether investor sentiment can explain stock returns on the German stock market. Based on a principal component analysis, we construct a sentiment indicator that condenses information of several well-known sentiment proxies. We show that this indicator explains the return spread between sentiment sensitive stocks and stocks that are not sensitive to sentiment fluctuations. Specifically, stocks that are difficult to arbitrage and hard to value are sensitive to the indicator. However, we do not find much predictive power of sentiment for future stock returns.
The Early News Catches the Attention: On the Relative Price Impact of Similar Economic Indicators.
with Dieter Hess
Journal of Futures Markets, 30, 909–937, 2010
Abstract: This study investigates why financial markets react to the release of some economic indicators while ignoring others with similar informational content. Based on a Bayesian learning model, we show that the market impact of an economic indicator depends crucially on its early availability. The sequential introduction of the two largest German business surveys provides a natural experiment by which the model's implications are tested empirically. We show that even a large and well-established indicator loses market impact if a similar indicator is launched and released earlier.
Political connectedness and firm performance: evidence from Germany.
with Stefan Ruenzi
German Economic Review, 11, 441–464, 2010
Abstract: This paper investigates politically connected firms in Germany. With the introduction of a new transparency law in 2007, information on additional income sources for all members of the German parliament became publicly available. We find that members of the conservative party (CDU/CSU) and the liberal party (FDP) are more likely to work for firms than members of left-wing parties (SPD and The Left) or the green party (Alliance 90/The Greens). Politically connected firms are larger, less risky and have lower market valuations than unconnected firms. They also have fewer growth opportunities, but slightly better accounting performance. On the stock market, connected firms significantly outperformed unconnected firms in 2006, i.e. before the publication of the data on political connections. Differences in stock market performance were much smaller in 2007.
How do commodity futures respond to macroeconomic news?
with Dieter Hess, He Huang
Financial Markets and Portfolio Management, 22, 127–146, 2008
Abstract: This paper investigates the impact of seventeen US macroeconomic announcements on two broad and representative commodity futures indices. Based on a large sample from 1989 to 2005, we show that the daily price response of the CRB and GSCI commodity futures indices to macroeconomic news is state-dependent. During recessions, news about higher (lower) inflation and real activity lead to positive (negative) adjustments of commodity futures prices. In contrast, we find no significant reactions during economic expansions. We attribute this asymmetric response to the state-dependent interpretation of macroeconomic news. Our findings are robust to several alternative business cycle definitions.
Neuroeconomics
Die Betriebswirtschaft, 67, 735–739, 2007
