Article history: Received 22 September 2011 Received in revised form 28 January 2013 Accepted 2 February 2013 Available online 9 February 2013 This paper analyzes the investor sentiment effect in four key European stock markets: France, Germany, Spain and the UK. The findings show that sentiment has a significant influence on returns, varying in intensity across markets. The variation appears t...

Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is base...

In this paper we provide empirical findings on the significance of positive feedback trading for the return behavior in the German stock market. Relying on the ShillerSentana-Wadhwani model, we use the link between index return auto-correlation and volatility to obtain a better understanding into the return characteristics generated by traders adhering to positive feedback trading strategies. O...

We comprehensively examine the effects of stock return volatility on firms’ financial and investment decisions. Consistent with theories of investment with financing frictions, firms with high volatility actively reduce their leverage, cut investment, increase cash holding, cut non-cash current assets such as inventories and account receivables, and cut dividend. The effects of volatility are s...

This paper presents a dynamic model of takeovers based on the stock market valuations of merging firms. The model incorporates competition and imperfect information and determines the terms and timing of takeovers by solving option exercise games between bidding and target shareholders. The implications of the model for returns to stockholders are consistent with the available evidence. In addi...

Donald Trump’s election was a significant surprise. The reaction of company stock prices to the election reflects shifts in investor expectations about economic growth, taxes, and trade policy. High-beta stocks outperformed, presumably due to strengthened growth expectations. Expectations of significant corporate tax cuts boosted high-tax firms, but hurt firms with significant net operating los...

We compare the effects of taxes and quotas for an environmental problem where the regulator and polluter have asymmetric information about abatement costs, and environmental damage depends on pollution stock. An increase in the slope of the marginal abatement cost curve, or a decrease in the slope of the marginal damage curve, favors taxes. An increase in the discount rate or the stock decay ra...

Competition among stock exchanges has increased dramatically over the last decade. To attract trading volume, most exchanges introduced makertaker fees, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in fees on the Toronto Stock Exchange, we analyze how the breakdown of trading fees between liquidity demanders and suppliers affects market ou...

We consider a market for storable pollution permits in which a large agent and a fringe of small agents gradually consume a stock of permits until they reach a long-run emissions limit. The subgame-perfect equilibrium exhibits no market power unless the large agent’s share of the initial stock of permits exceeds a critical level. We then apply our theoretical results to a global market for carb...

This paper investigates whether the degree of predictability can be explained by existing asset pricing models, and provides two theoretical upper bounds on the R-square of the regression of stock returns on predictors for given classes of models of interest. Empirically, we find that the predictive R-square is significantly larger than the upper bounds permitted by well known asset pricing mod...