We provide experimental evidence that relaxing margin restrictions to allow more short selling can exacerbate overpricing, even though it reduces equilibrium price levels. This is because smart-money traders initially profit more by front-running optimistic investor sentiment than by...

We provide experimental evidence that relaxing margin restrictions to allow more short-selling can exacerbate overpricing, even though it reduces equilibrium price levels. This is because smart-money traders initially profit more by front-running optimistic investor sentiment than by...

We report the results of three experiments based on the model of Hong and Stein (1999). Consistent with the model, results show that when informed traders do not observe prices, uninformed traders generate long-term price reversals by engaging in momentum trade. However, when informed traders...

Research in behavioral economics suggests that in addition to their traditional incentive effects, formal control systems can influence psychological motivations. We extend this literature by demonstrating experimentally that formal controls directly influence people’s sense of what behaviors...

We provide evidence that credit investors do not fully impound the implications of firms' cost structure when pricing credit default swaps. Information about firms' cost structure is not disclosed and needs to be estimated. Furthermore, the performance implications of firms' cost structure...