Research
Papers In Preparation
Categorical Processing in a Complex World (Updated 5/2025)
Joint with Thomas Graeber and Christopher Roth
A copy of the paper can be found here
Abstract: Real-world news environments comprise both granular quantitative information and coarse categorizations. For instance, company earnings are reported as a dollar figure alongside categorizations, such as whether earnings beat or missed market expectations. When processing capacity is limited, these components may compete for attention. We study the hypothesis that more severe processing constraints increase the relative reliance on coarser signals: people still discriminate between categories but distinguish less granularly within them, creating higher sensitivity around category thresholds but lower sensitivity elsewhere. Using stock market reactions to earnings announcements as our empirical setting, we document that hard-to-value stocks are associated with a more pronounced S-shaped response pattern around category thresholds. Naturalistic experiments that exogenously manipulate processing constraints provide supporting causal evidence in individual investor behavior. We then study two determinants of processing constraints in the field. First, more common sizes of surprise may be processed more precisely. Indeed, regions with more historical mass exhibit far higher return sensitivity. Second, a surprise about the category realization may capture attention, leaving less capacity to process the numerical signal. We find that category surprises, e.g., a profit when a loss was expected, are associated with diminished sensitivity to numerical earnings information.
The Retail Habitat (Updated 5/2025)
Joint with Toomas Laarits
Abstract: Retail investors trade hard-to-value stocks. We document a large and persistent spread in the stock-level intensity of retail trading, even allowing for known biases in the attribution of retail trades. Stocks with a high share of retail-initiated trades exhibit higher shares of intangible capital, longer duration cash-flows, and a higher likelihood of being mispriced. Consistent with retail-heavy stocks being harder to value, we document that these stocks are less sensitive to earnings news and more sensitive to retail order imbalances. Such segmentation of trading intensity arises in a model where informed investors face a trade-off between the benefits of hiding their trades within noisy retail investor order flow and the costs of producing information about the fundamentals of hard-to-value stocks.
What Triggers National Stock Market Jumps? (Updated 4/2025)
Joint with Scott Baker, Nicholas Bloom and Steven Davis
A copy of the paper can be found here
Abstract: We examine next-day newspaper accounts of large daily jumps in 19 national stock markets to assess their proximate cause, clarity as to cause, and geographic source. Our sample of over 8,000 jumps, reaching back to 1900 for the United States, yields several novel findings. First, jumps have become more grounded in readily perceived news developments over the past century. Second, news about monetary policy and government spending accounts for a highly disproportionate share of upward jumps. Third, upward jumps attributed to monetary policy and government spending shocks are much more likely after a stock market crash. In this sense, the “Fed put” emerged decades before the 1990s, characterizes fiscal policy as well, and extends to other countries. Fourth, jumps triggered by monetary policy foreshadow much lower volatility than other jumps. Finally, leading newspapers attribute 38 percent of jumps in their own national stock markets to US economic and policy developments. The US role in this regard dwarfs that of Europe and China.
Primary Capital Market Transactions and Index Funds (Updated 3/2025)
Joint with Chris Murray
Abstract: We document the effects of mechanical buying by CRSP-tracking funds on post-IPO returns and IPO deal structure. Leveraging a difference-in-differences design built on a 2017 CRSP rule change, we find that expected index fund demand leads Fast Track IPOs to outperform non-Fast Track IPOs by at least 5 percentage points shortly after the IPO, with reversion afterwards. Further, Fast Track IPOs raise over 6% more capital than similar non-Fast Track IPOs. Our findings inform a proposed alternative index rule to avoid a significant “shadow tax” on index fund investors and companies raising capital in IPOs.
Index Rebalancing and Stock Market Composition: Do Index Funds Incur Adverse Selection Costs? (Updated 1/2025)
Joint with John J. Shim
Abstract: We find that index funds incur adverse selection costs from responding to changes in the composition of the stock market. This is because indices rebalance directly in response to composition changes to maintain a value-weighted portfolio, both on the extensive margin (IPOs/delistings or additions/deletions) and intensive margin (issuance/buybacks). This rebalancing approach successfully tracks the market as it evolves, but effectively buys at high prices and sells at low prices. Using several long-short portfolios, we estimate that both intensive-margin and extensive-margin rebalancing trades lead to around a -4% return per year, though only the intensive-margin portfolio’s return is robust to factor exposures. Despite representing less than 10% of index funds’ AUM, these rebalancing portfolios do poorly enough to drag down overall index fund returns. We estimate that a “sleepy” strategy that is less responsive to changes in the stock market’s composition improves fund returns by 20 to 80 bps per year, and is monotonically increasing in how sluggishly it responds to compositional changes. We argue this is because sleepy rebalancing avoids the short- and medium-term adverse selection associated with relatively quickly taking the other side of firms’ primary and secondary market activity. Our findings highlight a large cost incurred by passive investors that simply wish to track the total stock market. And, our proposed simple alternative stock index design boosts returns by an order of magnitude more than typical index fund expense ratios.
Who Clears the Market When Passive Investors Trade? (Updated 10/2024)
Joint with John J. Shim
Abstract: We find that firms are the primary sellers of shares when index funds are net buyers, providing shares at a nearly one-for-one rate. Rather than provide liquidity, most demand-side institutions trade in the same direction as index funds, especially over long horizons. To establish causality, we develop a novel instrument for inelastic index fund demand, and show that firms are the most responsive, with prices as the coordinating mechanism. We show evidence consistent with stock compensation as the main source of firm issuance to satisfy passive demand, consistent with firms clearing the market for index fund buying but not selling.
Do Active Funds Do Better in What They Trade? (Updated 12/2023)
Joint with John J. Shim
Abstract: We develop two new measures to quantify active fund decisions at the position level. Our measures are designed to separate flow-based passive scaling from active rebalancing decisions. We find that additive active rebalancing – both for existing and new positions – predicts higher stock-level alpha over the following quarter. We show our results are not driven by mechanical price pressure, and provide evidence that funds may trade on forecasts for future earnings. Finally, we aggregate our stock-level measure to the portfolio level and show that actively adding to positions translates to outsized returns for fund investors.
Retail Investors’ Contrarian Behavior Around News and the Momentum Effect (Updated 11/2021)
Joint with Cheng (Patrick) Luo, Enrichetta Ravina and Luis M. Viceira
Using a large panel of U.S. accounts trades and positions, we show that retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and such contrarian trading contributes to post earnings announcement drift (PEAD) and momentum. Indeed, when we double-sort by momentum portfolios and retail trading flows, PEAD and momentum are only present in the top two quintiles of retail trading intensity. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. We show that the investors in our sample are representative of the universe of U.S. retail traders, and that the magnitude of the phenomena we describe indicate a quantitively substantial role of retail investors in generating momentum. The results on the timing of the flows and the magnitude of the return differences across momentum portfolios by retail trading intensity and size and sign of the earnings surprise, are confirmed at a longer two-year horizon. Alternative hypotheses, such as the disposition effect and stale limit orders, do not explain the phenomenon. We find that younger investors and day traders are more likely to be contrarians, while gender and number of trades are not correlated with our contrarian score, once other characteristics are controlled for. The pattern of web-clicks and the time spent analyzing each stock on the brokerage platform suggest an important role of attention in contrarian trading.
Published & Forthcoming Papers
Passive Ownership and Price Informativeness (Management Science, 9/2024)
Abstract: I show that passive ownership negatively affects the degree to which stock prices anticipate earnings announcements. Estimates across several research designs imply that the rise in passive ownership over the last 30 years has caused the amount of information incorporated into prices ahead of earnings announcements to decline by approximately 1/4th of its whole sample mean and 1/6th of its whole sample standard deviation.
The Passive-Ownership Share Is Double What You Think It Is (Journal of Financial Economics, 7/2024)
Previously circulated with the title Excess Reconstitution-Day Volume
Joint with Alex Chinco
Abstract: Each time a stock gets added to or dropped from an index, we ask: “How much money would have to be tracking that index to explain the huge spike in rebalancing volume we observe on reconstitution day?” While index funds held 16% of the US stock market in 2021, we put the overall passive ownership share at 33.5%. Our headline number is twice as large because it reflects index funds as well as other kinds of passive investors, such as institutional investors with internally managed index portfolios and active managers who are closet indexing.
The Disappearing Index Effect (Journal of Finance, forthcoming)
Joint with Robin Greenwood
Abstract: The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 7.4% in the 1990s to less than 1% over the past decade. This has occurred despite a significant increase in the share of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns during the 1990s, but only 0.1% between 2010 and 2020. We investigate the drivers of this surprising phenomenon and discuss implications for market efficiency. Finally, we document a similar decline in the index effect among other families of indices.
Customer Churn and Intangible Capital (JPE: Macro, September 2023)
Previously circulated with the title Firm Customer Bases: Churn and Networks
Joint with Scott Baker and Brian Baugh
Firm-level data, SSRN link Publisher Link
Abstract: Intangible capital is a crucial and growing piece of firms’ capital structure, but many of its distinct components are difficult to measure. We develop and make available several new firm-level metrics regarding a key component of intangible capital – firms’ customer bases – using an increasingly common class of household transaction data. Linking household spending to customer-facing firms that make up over 30% of total household spending, we show that churn in customer bases is associated with lower markups and market-to-book ratios and higher leverage. Churn is closely linked to firm-level volatility and risk, both cross-sectionally and over time. This new measure provides a clearer picture of firms’ customer and brand capital than existing metrics like capitalized SG&A, R&D, or advertising expenditures and is also observable for private firms. We demonstrate that low levels of customer churn push firms away from neoclassical investment responsiveness and that low churn firms are better able to insulate organization capital from the risk of key talent flight.
Trade Policy Uncertainty and Stock Returns (Journal of International Money and Finance, September 2021)
Joint with Marcelo Bianconi and Federico Esposito
Abstract: A recent literature has documented large real effects of trade policy uncertainty (TPU) on trade, employment, and investment, but there is little evidence that investors are compensated for bearing such risk. To quantify the risk premium associated with TPU, we exploit quasi-experimental variation in exposure to TPU arising from Congressional votes to revoke China’s preferential tariff treatment between 1990 and 2001. A long-short portfolio designed to isolate exposure to TPU earns a risk-adjusted return of 3.6-6.2% per year. This effect is larger in sectors less protected from globalization, and more reliant on inputs from China. Industries more exposed to trade policy uncertainty also had a larger drop in stock prices when the uncertainty began, and more volatile returns around key policy dates. Our results are not explained by the effects of policy uncertainty on expected cash-flows, investors’ forecast errors, and import competition from China.
The Unprecedented Stock Market Reaction to COVID-19 (The Review of Asset Pricing Studies, July 2020)
Joint with Scott Baker, Nicholas Bloom, Steven J. Davis, Kyle Kost, and Tasaneeya Viratyosin.
A copy of the paper can be found here
Abstract: No previous infectious disease outbreak, including the Spanish Flu, has impacted the stock market as forcefully as the COVID-19 pandemic. In fact, previous pandemics left only mild traces on the U.S. stock market. We use text-based methods to develop these points with respect to large daily stock market moves back to 1900 and with respect to overall stock market volatility back to 1985. We also evaluate potential explanations for the unprecedented stock market reaction to the COVID-19 pandemic. The evidence we amass suggests that government restrictions on commercial activity and voluntary social distancing, operating with powerful effects in a service-oriented economy, are the main reasons the U.S. stock market reacted so much more forcefully to COVID-19 than to previous pandemics in 1918-19, 1957-58 and 1968.
Environmental, Social, and Governance Criteria: Why Investors Are Paying Attention (Journal of Investment Management, January 2018)
Joint with Ravi Jagannathan and Ashwin Ravikumar
A copy of the paper can be found here
Abstract: We find that money managers could reduce portfolio risk by incorporating Environmental, Social, and Governance (ESG) criteria into their investment process. ESG-related issues can cause sudden regulatory changes and shifts in consumer tastes, resulting in large asset price swings which leave investors limited time to react. By incorporating ESG criteria in their investment strategy, money managers can tilt their holdings towards firms which are well prepared to deal with these changes, thereby managing exposure to these rare but potentially large risks.