Book to market (BM) has long been associated with growth opportunities. We argue that after a negative shock to earnings, the BM of the firm is mainly determined by the shortterm recovery ability of the firm. Firms that have high (low) probability to recover from a negative shock will have low (high) BM after a negative shock. We confirm this relation both analytically and empirically and show ...

This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relativel...

Recently, stock exchanges have altered their trading fees to subsidize liquidity by offering “make” rebates for providing liquidity through limit orders and charging “take” fees for consuming liquidity via marketable orders, leading to debate regarding the impact of these fees on market quality. Using an exogenous experiment performed by NASDAQ in 2015, I employ difference-in-differences analys...

This paper aims at testing the influence of Subprime Crisis on Chinese stock market returns. By means of newly proposed time series spatial analysis methodology, we investigate the dominance behavior of daily returns on both Shanghai Stock Exchange Composite Index and Shenzhen Stock Exchange Component Index between before and after the crisis. Little spatial dominance could be found, even consi...

In this paper, we correct part (b) of Theorem 6 of Grossman and Stiglitz (GS, 1980). We demonstrate that when the private signal tends to be perfect, the market converges to strong-form efficiency, and thus informed and uninformed traders have almost homogeneous beliefs about the stock payoff, but there is still significant net trade, rather than no trade as erroneously shown by GS. We further ...

We introduce a method of accurately and efficiently modeling a large population of participants in a financial market. Each participant is modeled as having an internal preference state affected by the continual arrival of exogenous information and by the behavior of others. In order to describe a community of traders, we introduce a population equation that is derived rigorously from the under...

The well-known approximation of the difference between the arithmetic average and geometric average returns as one-half of the variance of the underlying returns is reexamined using Jensen’s Inequality. The ”defect” in Jensen’s Indequality, is given an exlicit formula in terms of the variance following some ideas put forward by Holder. A new form of the AM-GM Inequality follows and is is applie...

We study asset-pricing implications of innovation in a general-equilibrium overlappinggenerations economy. Innovation increases the competitive pressure on existing firms and workers, reducing the profits of existing firms and eroding the human capital of older workers. Due to the lack of inter-generational risk sharing, innovation creates a systematic risk factor, which we call “displacement r...

We show that tests for differences in trade execution costs using standard nearest neighbor matching estimation techniques typically have comparable empirical power but less bias than more “sophisticated” alternatives. However, estimation techniques that place more weight on distant firms (e.g. kernel-based matching) have better testing power and produce tighter confidence intervals when there ...

The consensus wisdom of active mutual fund managers, as reflected in their average overand underweighting decisions, contains valuable information about future stock returns. Analyzing a comprehensive sample of active U.S. equity funds 1984—2008, we find that stocks heavily overweighted by active funds outperform their underweighted counterparts by more than 7% per year, after adjustments for t...