Information Processing Constraints and Asset Mispricing

I analyse a series of natural quasi-experiments - centred on betting exchange data on the Wimbledon Tennis Championships - to determine whether information processing constraints are partially responsible for mispricing in asset markets. I find that the arrival of information during each match leads to substantial mispricing between two equivalent assets, and that part of this mispricing can be attributed to differences in the frequency with which the two prices are updated inplay. This suggests that information processing constraints force the periodic neglect of one of the assets, thereby causing substantial, albeit temporary, mispricing in this simple asset market

The impact of attention to news about tax changes on the stock market

We approach to point out new direction of measurement the attention of the news related to changes in taxes by using the application Google Trends. The objective of the study is to extend literature that investigates the impact of the information's search intensity provided by Google Trends on capital market. We show that increasing attention on tax changes measured by Google search decrease stock prices of the US companies listed on NASDAQ. Moreover, we focus on abnormal Google searches related to particular shocks. The study investigates the positive relationship between attention to news about tax changes and stock prices in a specific year. The cross-sectional analysis employs data from 2004 and 2005. At that time, President George Bush enacted tax breaks for overseas corporate profits, which had a great impact on search intensity within the period. Additionally, we differentiate between market capitalisation by using the dummy variables to put on the role changes of probability on selected datasets. The results confirmed higher impact of attention on large cap companies and point out the importance of sentiment analysis at liquid markets.O

Salience and the disposition effect: Evidence from the introduction of "Cash-Outs" in betting markets

The disposition effect describes the tendency of investors to sell assets that have increased in value since purchase, and hold those that have not. We analyse the introduction of betting market ‘Cash-Outs’, which provide a continual update – and therefore increase the salience – of bettors’ paper profits/losses on each bet. We find that the introduction of Cash-Out increased the disposition effect in this market, as punters sold their profitable bets with greater frequency than before. We do not, however, find that the disposition effect has any impact on asset prices, either before or after this intervention

Valuation of Government Policies and Projects

Governments play a central role in the allocation of capital and risk in the economy. Evaluating the cost to taxpayers of government investments requires an assumption about the government’s cost of capital. Governments often take their borrowing rate to be their cost of capital, which implicitly treats the market risk associated with their activities as having no cost to taxpayers. This article reviews the theoretical and practical rationale for treating market risk as a cost to governments, presents an interpretive review of the growing literature that applies the concepts and tools of modern finance to evaluating the costs of government policies and projects and suggests directions for future research. Examples considered include deposit insurance, Fannie Mae and Freddie Mac, the Federal Reserve’s emergency lending facilities, student loans, real infrastructure investments, and public pension plans

Who gains from information asymmetry?

This article considers an asymmetric contest with incomplete information. There are two types of players: informed and uninformed. Each player has a different ability to translate effort into performance in terms of the contest success function. While one player's type is known to both players, the other is private information and known only to the player himself. We compare the Bayesian Nash equilibrium outcome of a one-sided private information contest to the Nash equilibrium with no private information, in which both players know the type of the other player. We show conditions under which uncertainty increases the investment of the uninformed player and the rent dissipation of the contest, while decreasing the expected net payoff of the informed player. In addition, we consider conditions under which the informed player - before knowing his own type - prefers that the uninformed player knows his type. Moreover, we show conditions for the existence/non-existence of equilibrium in a two-stage contest in which the informed player declares his type (or does not declare) in the first stage and in the second stage the two players play according to the information available to them

Effect of resource spatial correlation and Hunter-Fisher-Gatherer mobility on social cooperation in Tierra del Fuego

This article presents an agent-based model designed to explore the development of cooperation in hunter-fisher-gatherer societies that face a dilemma of sharing an unpredictable resource that is randomly distributed in space. The model is a stylised abstraction of the Yamana society, which inhabited the channels and islands of the southernmost part of Tierra del Fuego (Argentina-Chile). According to ethnographic sources, the Yamana developed cooperative behaviour supported by an indirect reciprocity mechanism: whenever someone found an extraordinary confluence of resources, such as a beached whale, they would use smoke signals to announce their find, bringing people together to share food and exchange different types of social capital. The model provides insight on how the spatial concentration of beachings and agents’ movements in the space can influence cooperation. We conclude that the emergence of informal and dynamic communities that operate as a vigilance network preserves cooperation and makes defection very costly.MICINN http://www.idi.mineco.gob.es/ CSD2010-00034 (SimulPast CONSOLIDER-INGENIO 2010) and HAR2009-06996; the government of Castilla y Leónhttp://www.jcyl.es/ GREX251-2009; the Argentine CONICET http://www.conicet.gov.ar/PIP-0706; and the Wenner-Gren Foundation for Anthropological Researchhttp://www.wennergren.org/ "Social Aggregation: A Yamana Society's Short Term Episode to Analyse Social Interaction, Tierra del Fuego, Argentina". The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscrip

CEO Profile and Earnings Quality

This paper introduces the PSCORE, which aggregates nine personal characteristics of chief executive officers (CEOs), to signal the quality of earnings. The PSCORE is a composite score based on publicly available data on CEOs. The study reports strong positive relationships between the PSCORE and two different proxies for earnings quality, (i) discretionary accruals and (ii) financial statement errors, measured by deviations of the first digits of figures reported in financial statements from those expected by Benford’s Law. Further analyses indicate that the relationships between the PSCORE and the proxies for earnings quality become more pronounced when CEOs have high equity-based compensation incentives. The findings have some implications for practitioners

Joy leads to overconfidence, and a simple countermeasure

Overconfidence has been identified as a source of suboptimal decision making in many real-life domains, with often far-reaching consequences. This study identifies a mechanism that can cause overconfidence and demonstrates a simple, effective countermeasure in an incentive-compatible experimental study. We observed that joy induced overconfidence if the reason for joy (an unexpected gift) was u

Corporate boards and the performance of Asian firms: A meta-analysis

The prevalence of ownership concentration in Asian firms presents a challenge to the influential agency theory-based understanding of the role of corporate boards. In this paper we develop and test hypotheses about board attributes and firm performance that reflect Asian institutional conditions. We present the first meta-analysis of the relationship between board attributes and performance of Asian firms using a varied set of meta-analytical techniques on a database of 86 studies covering nine Asian countries. First, we find that board structure and composition preferences are influenced by the identity of the concentrated owner. Second, consistent with US data, we find very limited evidence of a direct relationship between board attributes and firm financial performance in the Asian context. Third, we find that the relationship between board structure and composition and firm performance is mediated by the revealed strategic preferences of Asian firms specifically by the level of R&D investment