In a setting with information asymmetry and a tradable value-weighted market index, ambiguity averse investors hold undiversified portfolios, and assets have non-zero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP) whose weights depend on information precisions...

We derive a separation theorem: investors hold a common risk-adjusted market portfolio regardless of their information sets, and a portfolio based upon their private signals. This implies that investors have non-negligible holdings of assets they know little about, so nonparticipation remains a...

We review theory and evidence relating to herd behaviour, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behavior of investors,...

In our model, informed players decide whether or not to disclose, and observers allocate attention among disclosed signals, and toward reasoning through the implications of a failure to disclose. In equilibrium disclosure is incomplete, and observers are unrealistically optimistic. Nevertheless,...

Psychological evidence indicates that decision quality declines after an extensive session of decision-making, a phenomenon known as decision fatigue. We study whether decision fatigue affects analysts' judgments. Analysts cover multiple firms and often issue several forecasts in a single day....

We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation; but only among overvalued...

We investigate whether and when firms manage the tone of words in earnings press releases, and how investors react to tone management. We estimate abnormal positive tone, ABTONE, as a measure of tone management from residuals of a tone model that controls for firm quantitative fundamentals such...

Sometimes resources are badly employed because of coordination failures. Actions by decisionmakers that affect the likelihood of such failures cause ‘systemic risk.' We consider here the externality in the choice of ex ante risk management policies by individuals and firms: they are concerned...

We investigate whether non-audit service (NAS) purchases are correlated among audit committee (AC) interlocked firms. We then examine whether financial reporting quality and future firm performance vary with the amount of correlated NAS purchases from the AC interlock. We find that firms in the...

Past research has shown that the level of operating accruals is a negative cross-sectional predictor of stock returns. This paper examines whether the accrual anomaly extends to the aggregate stock market. In contrast with cross-sectional findings, there is no indication that aggregate operating...