What Do Independent Directors Know? Evidence from Their Trading

We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement.

What Do Outside Directors Know? Evidence From Outsider Trading

Sarbanes-Oxley and other regulatory reform have advocated to put more outsiders on the board. The rationale of this measure is that outsiders are more independent, while a potential drawback is that they might not know enough about the firm to be effective monitors. Having information about the firm is a necassary condition to be an effective monitor. This paper investigates whether outside directors have information about the firm and its conditions. Using a comprehensive sample of executives' and board of directors' transactions from 1986 to 2003 in U.S. companies, we compare the trading profits of three types of individuals: (i) insiders (executives of the firm), (ii) non executive directors who are large blockholders, and (iii) directors who are neither employees of the firm, nor large blockholders (outside directors). Insiders and outside directors earn higher abnormal returns than the market. Insiders generally perform better than outsiders in purchases transactions. These results suggest that outside directors do have substantial inside information about the firm, even though they know less than the executives. We also find that in better governed firms the difference in performance between outsiders' and insiders' returns is lower, suggesting that firms with better governance structure may have better mechanism in place that allows outsiders to receive more informationEmpirical Corporate Governance; Monitoring; Insider Trading

Habit Persistence and Keeping Up with the Joneses:Evidence from Micro Data

This paper provides evidence that habit persistence is an important determinant of household consumption choices, in a setting that allows for heterogeneity and household-specific interest rates. By estimating Euler equations for a representative sample of U.S. credit-card account holders, I find that the strength of external habit, captured by the fraction of the consumption of the reference group that enters the utility function, is 0.290, and that the strength of internal habit, represented by household past consumption, is 0.503. My results are robust to the inclusion of various measures of economic activity in the regression, tests for the presence of aggregate shocks, liquidity constraints, precautionary saving motives, and learning. Aggregation of the Euler equations as a weighted average of individual marginal rates of substitution accounts for heterogeneity and market incompleteness and preserves the results

What Do Independent Directors Know? Evidence from Their Trading

We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm’s officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other indepen- dent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around arestatement announcement

Risk aversion and wealth: evidence from person-to-person lending portfolios

We estimate risk aversion from the actual financial decisions of 2,168 investors in Lending Club (LC), a person-to-person lending platform. We develop a methodology that allows us to estimate risk aversion parameters from each portfolio choice. Since the same individual makes repeated investments, we are able to construct a panel of risk aversion parameters that we use to disentangle heterogeneity in attitudes towards risk from the elasticity of investor-specific risk aversion to changes in wealth. In the cross section, we find that wealthier investors are more risk averse. Using changes in house prices as a source of variation, we find that investors become more risk averse after a negative wealth shock. These preferences consistently extrapolate to other investor decisions within LC

Habit Persistence and Keeping Up with the Joneses:Evidence from Micro Data

This paper provides evidence that habit persistence is an important determinant of household consumption choices, in a setting that allows for heterogeneity and household-specific interest rates. By estimating Euler equations for a representative sample of U.S. credit-card account holders, I find that the strength of external habit, captured by the fraction of the consumption of the reference group that enters the utility function, is 0.290, and that the strength of internal habit, represented by household past consumption, is 0.503. My results are robust to the inclusion of various measures of economic activity in the regression, tests for the presence of aggregate shocks, liquidity constraints, precautionary saving motives, and learning. Aggregation of the Euler equations as a weighted average of individual marginal rates of substitution accounts for heterogeneity and market incompleteness and preserves the results

Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios

We estimate risk aversion from the actual financial decisions of 2,168 investors in Lending Club (LC), a person-to-person lending platform. We develop a methodology that allows us to estimate risk aversion parameters from each portfolio choice. Since the same individual makes repeated investments, we are able to construct a panel of risk aversion parameters that we use to disentangle heterogeneity in attitudes towards risk from the elasticity of investor-specific risk aversion to changes in wealth. In the cross section, we find that wealthier investors are more risk averse. Using changes in house prices as a source of variation, we find that investors become more risk averse after a negative wealth shock. These preferences consistently extrapolate to other investor decisions within LC.

The effect of dividends on consumption

Classical models predict that the division of stock returns into dividends and capital appreciation does not affect investor consumption patterns, while mental accounting and other economic frictions predict that investors have a higher propensity to consume from stock returns in the form of dividends. Using two micro data sets, we show that investors are indeed far more likely to consume from dividends than capital gains. In the Consumer Expenditure Survey, household consumption increases with dividend income, controlling for total wealth, total portfolio returns, and other sources of income. In a sample of household investment accounts data from a brokerage, net withdrawals from the accounts increase one-for-one with ordinary dividends of moderate size, controlling for total portfolio returns, and also increase with mutual fund and special dividends. We comment on several potential explanations for the results