Frog in the Pan: Continuous Information and Momentum

We test a frog-in-the-pan (FIP) hypothesis that predicts investors are inattentive to information arriving continuously in small amounts. Intuitively, we hypothesize that a series of frequent gradual changes attracts less attention than infrequent dramatic changes. Consistent with the FIP hypothesis, we find that continuous information induces strong persistent return continuation that does not reverse in the long run. Momentum decreases monotonically from 5.94% for stocks with continuous information during their formation period to –2.07% for stocks with discrete information but similar cumulative formation-period returns. Higher media coverage coincides with discrete information and mitigates the stronger momentum following continuous information

Volatility Clustering and the Bid-ask Spread: Exchange Rate Behaviour in Early Renaissance Florence

Abstract This paper investigates the nature and behavior of the domestic (local) currency market that existed in Florence (Italy) during the late 14th and early 15th centuries (a.k.a. the Early Renaissance). We find that the extant volatility and microstructure models developed for modern asset markets are able to describe the statistical volatility properties observed for the denaro-florin exchange rate. Volatility is clustered and is related to the bid-ask spread. This supports the notion that, although there are huge social, industrial and technological differences between capitalism then and now, individuals trading financial assets in an organized venue behave in a similar manner

Patent Trolls: Evidence from Targeted Firms

We provide theoretical and empirical evidence on the evolution and impact of non-practicing entities (NPEs) in the intellectual property space. Heterogeneity in innovation, given a cost of commercialization, results in NPEs that choose to act as “patent trolls" that chase operating firms' innovations even if those innovations are not clearly infringing on the NPEs' patents. We support these predictions using a novel, large dataset of patents targeted by NPEs. We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks). Furthermore, NPEs target firm profits arising from exogenous cash shocks unrelated to the allegedly infringing patents. We next show that NPEs target firms irrespective of the closeness of those firms' patents to the NPEs', and that NPEs typically target firms that are busy with other (non-IP related) lawsuits or are likely to settle. Lastly, we show that NPE litigation has a negative real impact on the future innovative activity of targeted firms

Channels of Influence

We demonstrate that simply by using the ethnic makeup surrounding a firm’s location, we can predict, on average, which trade links are valuable for firms. Using customs and port authority data on the international shipments of all U.S. publicly-traded firms, we show that firms are significantly more likely to trade with countries that have a strong resident population near their firm headquarters. We use the formation of World War II Japanese Internment Camps to isolate exogenous shocks to local ethnic populations, and identify a causal link between local networks and firm trade links. Firms that exploit their local networks (strategic traders) see significant increases in future sales growth and profitability, and outperform other importers and exporters by 5%-7% per year in risk-adjusted stock returns. In sum, our results document a surprisingly large impact of immigrants’ economic role as conduits of information for firms in their new countries

Investment in a Smaller World: The Implications of Air Travel for Investors and Firms

A large literature reports that proximity influences investment. We extend the measurement of proximity beyond distance and report that air travel reduces local investment bias. This result is confirmed using the initiation of connecting flights through recently opened air hubs because investment at destinations served by these connecting flights increases after, not before, their initiation. Air travel also broadens the investor base of firms and lowers their cost of equity by approximately 1%. Overall, air travel improves the diversification of investor portfolios and lowers the cost of equity for firms

Advertising Expensive Mortgages

We use a unique dataset that combines information on advertising and mortgages originated by subprime lenders to study whether advertising helped consumers find cheaper mortgages. Lenders who advertise more within a region sell more expensive mortgages, measured as the excess rate of a mortgage after accounting for a broad set of borrower, contract, and regional characteristics. These effects are stronger for mortgages sold to less sophisticated consumers. We exploit variation in mortgage advertising induced by the entry of Craigslist across different regions as well as a battery of other tests to demonstrate that the relation between advertising and mortgage expensiveness is not spurious. Our estimates imply that consumers pay on average $7,500 more when borrowing from a lender who advertises. Analyzing advertising content reveals that initial/introductory rates are advertised frequently in a salient fashion in contrast to reset rates, which are rarely advertised. Moreover, the advertised price (APR) is at best uncorrelated with mortgage expensiveness. Our facts reject the canonical models of informative advertising and are instead more consistent with persuasion models, in which the reset rate is shrouded/not salient and advertising is used steer unsophisticated consumers into bad choices by increasing the salience of the initial interest rate

Advertising Expensive Mortgages

We use a unique dataset that combines information on advertising and mortgages originated by subprime lenders to study whether advertising helped consumers find cheaper mortgages. Lenders who advertise more within a region sell more expensive mortgages, measured as the excess rate of a mortgage after accounting for a broad set of borrower, contract, and regional characteristics. These effects are stronger for mortgages sold to less sophisticated consumers. We exploit variation in mortgage advertising induced by the entry of Craigslist across different regions as well as a battery of other tests to demonstrate that the relation between advertising and mortgage expensiveness is not spurious. Our estimates imply that consumers pay on average $7,500 more when borrowing from a lender who advertises. Analyzing advertising content reveals that initial/introductory rates are advertised frequently in a salient fashion in contrast to reset rates, which are rarely advertised. Moreover, the advertised price (APR) is at best uncorrelated with mortgage expensiveness. Our facts reject the canonical models of informative advertising and are instead more consistent with persuasion models, in which the reset rate is shrouded/not salient and advertising is used steer unsophisticated consumers into bad choices by increasing the salience of the initial interest rate

Sell-Side Debt Analysts and Debt Market Efficiency

We explore sell-side debt analysts’ contributions to the efficiency of securities markets. We document that debt returns lag equity returns less when debt research coverage exists, consistent with debt analysts facilitating the process by which available information is impounded in debt prices. The effect is incremental to, but comparable in magnitude to, hedge fund ownership’s effect. No such effect exists for credit rating agencies. We also find that the dissemination of debt reports has an immediate effect on return volatility in both markets, consistent with debt analysts providing new information to securities markets. Increased return covariation suggests that this information impacts the pricing of debt and equity in the same direction. A large percentage of debt reports do not induce any immediate debt market return reaction but do induce an equity return reaction, consistent with new information being provided despite the absence of a debt market reaction. Finally, there is systematic variation in the debt market’s trading and return reactions to debt research. Timely reports and those by high-reputation brokers induce a quicker trading response, thus enhancing liquidity, while only timely reports induce a greater return response. This study illuminates the institutional underpinnings of debt market efficiency, and it has important implications for information content tests in the debt market, where trading is limited