Measuring the extent to which a firm is financially constrained is critical in assessing capital structure. Extant measures of financial constraints focus on macro firm characteristics such as age and size, variables highly correlated with other firm attributes. We parse 10-K disclosures filed with the U.S. Securities and Exchange Commission (SEC) using a unique lexicon based on constraining words. We find that the frequency of constraining words exhibits very low correlation with traditional measures of financial constraints and predicts subsequent liquidity events, such as dividend omissions or increases, equity recycling, and underfunded pensions, better than widely used financial constraint indexes.

We examine the ability of three groups of informed market participants to anticipate the 2007–2008 financial crisis. Institutional investors and financial analysts exhibit some awareness of the impending crisis in their preference for nonfinancial stocks over financial stocks. In contrast, corporate insiders of financial firms appear to be completely unaware of the timing and extent of the financial crisis. Net purchases by managers of financial firms exceed those by managers of nonfinancial firms over the entire 2006–2008 period. Our results add considerable weight to the argument that the financial crisis was more a case of flawed judgment than flawed incentives.

We trace directors through time and across firms to study whether acquirers’ access to nonpublic information about potential targets via their directors’ past board service histories affects the market for corporate control. In a sample of publicly traded U.S. firms, we find acquirers about 4.5 times more likely to buy firms where their directors once served. Effects are stronger when the acquirer has better corporate governance, the interlocked director has a larger ownership stake at the acquirer, or the director played an important role during past service. The findings are robust to endogeneity of board composition and controls for contemporaneous interfirm interlocks.

We show that mutual funds employ portfolio strategies based on market sentiment. We build a proxy for the degree of a fund’s sentiment beta (or FSB). The low-FSB funds outperform high-FSB funds, even after controlling for standard risk factors and fund characteristics. This effect is sizable and delivers a net-of-risk performance of 3.8% per year. Funds with a lower FSB follow more idiosyncratic strategies, suggesting that FSB is a deliberate, active choice of the fund manager. A sentiment contrarian strategy leads to high flows due to its superior performance, whereas a sentiment catering strategy fails to attract significant investor flows.

We study managerial turnover for both internally managed mutual funds and those managed externally by subadvisors. We argue that turnover of subadvisors provides sharper tests and helps address several unresolved issues and puzzles from the previous literature. We find dramatically stronger inverse relations between subadvisor departures and lagged returns, and new evidence on how past flow predicts turnover. We find no evidence of improvements in return performance related to departures, but flow improvements are associated with departures of poor past performers. Our findings represent new evidence on how investors, sponsors, and boards learn about and evaluate mutual fund management performance.

We utilize the decennial U.S. Census to study social effects in housing consumption across 4 million households from 126 ethnic groups and 2,071 geographic locations in the United States. We find that the homeownership decisions within ethnic groups are locally correlated, after controlling for the homeownership rates within the group and the region. Social influence is stronger for younger, less educated, and lower-income individuals; immigrants; and Americans with ancestors from more unequal, uncertainty-avoiding, and collectivistic cultures. Our results suggest that both status and information considerations play an important role in the social comparison process in capital markets.

The enterprise multiple (EM) predicts the cross section of international returns. The return predictability of EM is similarly pronounced in developed and emerging markets and likewise strong among small and large firms. An international portfolio of low-EM firms outperforms a portfolio of high-EM firms by about 1% per month. The EM value premium is individually significant for the majority of countries, remains largely unexplained by existing asset pricing models, is robust after controlling for comovement with the respective U.S. premium, and is highly persistent for up to 5 years after portfolio formation, making it a promising strategy for investors.

We explore the determinants of equity price risk of nonfinancial corporations. Operating and asset characteristics are by far the most important determinants of risk. For the median firm, financial risk accounts for only 15% of observed stock price volatility. Furthermore, financial risk has declined over the last 3 decades, indicating that any upward trend in equity volatility was driven entirely by economic risk factors. This explains why financial distress (as opposed to economic distress) was surprisingly uncommon in the nonfinancial sector during the 2007–2009 crisis even as measures of equity volatility reached unprecedented highs.

Two-pass cross-sectional regression (TPCSR) is frequently used in estimating factor risk premia. Recent papers argue that the common practice of grouping assets into portfolios to reduce the errors-in-variables (EIV) problem leads to loss of efficiency and masks potential deviations from asset pricing models. One solution that allows the use of individual assets while overcoming the EIV problem is iterated TPCSR (ITPCSR). ITPCSR converges to a fixed point regardless of the initial factors chosen. ITPCSR is intimately linked to the asymptotic principal components (APC) method of estimating factors since the ITPCSR estimates are the APC estimates, up to a rotation.

The consensus view of the influential economist John Maynard Keynes is that he was a stellar investor. We provide an extensive quantitative appraisal of his performance over a quarter century and present detailed analysis of his archived trading records. His top-down approach initially generated disappointing returns with no evidence of any market-timing ability. However, from the early 1930s his performance improved as he evolved into a bottom-up stock picker with substantial active risk and pronounced size and value tilts. Our reconstruction of Keynes’s stock trading provides a unique record of realized performance and sheds light on how equity investing developed historically.

I test the Duffie, Gârleanu, and Pedersen hypothesis that security prices incorporate expected future securities lending income. To determine whether institutional investors anticipate gains from future lending of securities, I examine their trading behavior around loan-fee increases. The evidence suggests that institutions buy shares in response to an increase in lending fees, and that this could explain the premium associated with high-lending-fee stocks. Expected future lending income affects stock prices, although the effect seems to be attenuated by the negative information that arises from short selling.

This study investigates whether the existence or strength of any misreaction in the options market is affected by investor sophistication and investor sentiment. Based on a unique data set of the complete history of all transactions in the Taiwan options market, we find that individual investors exhibit significant misreaction to information and that this misreaction becomes stronger during periods of high investor sentiment. In addition, more active or aggressive individual investors always exhibit misreaction and do not learn from their past mistakes. Our empirical results are robust to alternative measures of investor sentiment and definitions of long- and short-term horizons.