Search Results
Working Paper
Concentrated shareholdings and the number of outside analysts
Assuming some fixed cost to information acquisition, diffuse shareholders in publicly held firms have little incentive to produce information that can substitute for the services of financial analysts. However, we argue that concentrated shareholdings, either by outsiders like institutions or by inside managers, reduce the demand for analyst services. The former group finds it worthwhile to produce its own information and avoid any moral hazard problems associated with analyst forecasts, while the concentration of shareholdings by insiders reduces the moral hazard problem associated with ...
Working Paper
Belief dispersion among household investors and stock trading volume
We study the effects of belief dispersion on stock trading volume. Unlike most of the existing work on the subject, our paper focuses on how household investors' disagreements on macroeconomic variables influence market-wide trading volume. We show that greater belief dispersion among household investors is associated with significantly higher trading volume, even after controlling for the disagreements among professional forecasters. Further, we find that the belief dispersion among household investors who are more likely to own stocks has more pronounced effects on trading volume, ...
Working Paper
Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical?
Data obtained from special questions on the Michigan Survey of Consumer Attitudes over several years are used to analyze stock market beliefs and portfolio choices of household investors. Consistent with other survey results, expected future returns appear to be extrapolated from past realized returns. The data also indicate that expected risk and return are strongly influenced by economic prospects. When investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility, which implies that household Sharpe ratios are procyclical. ...
Journal Article
The corporate governance of banks
The study argues that commercial banks pose unique corporate governance problems for managers and regulators as well as for claimants on the banks' cash flows, such as investors and depositors. The authors support the general principle that fiduciary duties should be owed exclusively to shareholders. However, in the special case of banks, they contend that the scope of the fiduciary duties and obligations of officers and directors should be broadened to include creditors. In particular, the authors call on bank directors to take solvency risk explicitly and systematically into account when ...
Working Paper
Foreign stock holdings: the role of information
The household finance literature documents a large fraction of the population not participating in stock markets. It is also puzzling that a much greater share of households do not participate in foreign stock markets. Recent empirical evidence points towards the role of information in determining agents' portfolio choices. I test these results into a model that incorporates information on agents' portfolio allocation decision. In the model, consumers can invest in both domestic and foreign stocks and to update their information set, agents have to pay a cost implying that consumers update ...
Periodic Essay
Japan's cross-shareholding legacy: the financial impact on banks
Japanese banks' financial results for the Fiscal Year Ending (FYE) March 2009 marked their worst performance in recent years. Although soaring loan loss charges contributed to the banks' weak performances, losses on equity securities were also a key driver. These losses have drawn renewed attention to the practice of Japanese banks owning stock in the companies to which they lend through so-called cross-shareholdings, and the market risk resulting from these holdings. This Asia Focus provides a brief background on the development of cross-shareholding. The report also examines some of the ...
Journal Article
Executive equity compensation and incentives: a survey
Stock and option compensation and the level of managerial equity incentives are aspects of corporate governance that are especially controversial to shareholders, institutional activists, and government regulators. Similar to much of the corporate finance and corporate governance literature, research on stock-based compensation and incentives has not only generated useful insights, but also produced many contradictory findings. Not surprisingly, many fundamental questions remain unanswered. In this study, the authors synthesize the broad literature on equity-based compensation and executive ...
Newsletter
Common sense about executive stock options
Working Paper
Investment, idiosyncratic risk, and ownership
High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if ...
Journal Article
Stockholders