Asset Management

We provide a framework for identifying accounting numbers that indicate risk and expected return. Under specified accounting conditions for measuring earnings and book value, book-to-price (B/P) indicates expected returns, providing justification for B/P in asset pricing models. However, the framework also points to earnings-to-price (E/P) as a risk characteristic. Indeed, E/P, rather than B/P, is the relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth.

We examine the cost-effectiveness, from the shareholders' perspective, of the accounting standards issued by the FASB during 1973-2009. We evaluate (i) the stock market reactions of firms affected by the standards surrounding events that changed the standard's probability of issuance; and (ii) whether the market reactions are related, in the cross-section, to agency problems, information asymmetry, proprietary costs, contracting costs, and changes in estimation risk.

Using a novel sample of professional asset managers, we document positive incremental alpha on newly purchased stocks that decays over twelve months. While managers are successful forecasters at these short-to-medium horizons, their average holding period is substantially longer (2.2 years). Both slow alpha decay and the horizon mismatch can be explained by strategic trading behavior.

Exploiting variation in the timing of resets of adjustable rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50%) induces a significant increase in car purchases (up to 35%). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment.

We examine the relation between shareholder activism and voluntary disclosure. An important consequence of voluntary disclosure is less adverse selection in the capital markets. One class of traders that finds less adverse selection unprofitable is activist investors who target mispriced firms whose valuations they can improve. Consistent with this idea, we find that managers issue earnings and sales forecasts more frequently when their firm is more at risk of attack by activist investors, and that these additional disclosures reduce the likelihood of becoming an activist's target.

We exploit the release of a mobile application for a financial aggregation platform to analyze how technology adoption changes consumer financial decision making. The app reduced the cost of accessing personal financial information, and we find that this led to a drop in non-sufficient fund (NSF) fees. Because of the manner in which these fees are incurred, this represents an unambiguous welfare improvement for users of the platform. The leading explanation for this result appears to be mistake avoidance due to easier access to information.

We evaluate the effects of the 2009 Home Affordable Modification Program (HAMP) that provided intermediaries with sizeable financial incentives to renegotiate mortgages. HAMP increased intensity of renegotiations and prevented substantial number of foreclosures but reached just one-third of its targeted indebted households. This shortfall was in large part due to low renegotiation intensity of a few large intermediaries and was driven by intermediary-specific factors.

Individuals behave differently when they know the objective probability of events and when they do not. The smooth ambiguity model accommodates both ambiguity (uncertainty) and risk. For an incomplete, competitive asset market, we develop a revealed preference test for asset demand to be consistent with the maximization of smooth ambiguity preferences; and we show that ambiguity preferences constructed fromfinite observations converge to underlying ambiguity preferences as observations become dense.

When one thinks hedge fund fees, the phrase “2 and 20” — meaning a 2% management fee and 20% performance fee — usually comes to mind. This wasn't always the case.