Traditional pecking-order theory (POT) cannot explain why good-quality firms issue equity: this is often considered to be an empirical puzzle. We build a model of capital structure that has elements of both asymmetric information and behavioral finance. Firms have private information about their...

The following paper is a theoretical introduction of the misinformation effect to behavioural finance. The misinformation effect causes a memory report regarding an event or particular knowledge to become contaminated with misleading information from another source. The paper aims to describe...

Motivated by research in psychology and experimental economics, we assume that investors update their beliefs about an asset's value upon observing the price, but only when the price clearly reveals that others obtained private information that differs from their own private information....

This paper explores the long-standing empirical fact of increased trading volume around news releases through the lens of canonical models of gradual information diffusion and differences of opinion. I use a unique dataset of clicks on news by key finance professionals to distinguish between...

Motivated by research in psychology and experimental economics, we assume that investors update their beliefs about an asset's value upon observing the price, but only when the price clearly reveals that others obtained private information that differs from their own private information. In...

Short-sale constrained past-winners and losers both underperform strongly in the first year post-formation, earning market-adjusted returns of −13%, and −17%, respectively. However, constrained winners continue to underperform for the following four years, earning a cumulative...

We study return predictability using a model of speculative trading among relatively overconfident competitive traders who agree to disagree about the precision of their private information. Although traders apply Bayes Law consistently, returns are predictable. In addition to trading on...

The financial crisis of 2008 was preceded by smaller crises that also produced substantial levels of systemic risk. In addition to their impact on global markets, these lesser events shared several symptoms with the ones that later caused the Great Recession. If regulators and supervisors of the...

Using a shock to transparency in a parimutuel betting market, we show that capital flows increase in public information even in markets with largely risk-seeking participants. The evidence indicates that capital allocation decisions are partly a function of behavioral mechanisms such as the...

Abstract We study the effects of investor disagreement on informed trading by activist investors using high-frequency disagreement data derived from the investor social network StockTwits. Greater investor disagreement leads to more trading activity on the subsequent day by privately informed...