We test and offer support to Merton's (1987) theory that difference in a stock's investor recognition affects its cost of capital. In the U.S. market, using the breadth of ownership among retail investors as a proxy for investor recognition, we show that a long-short portfolio based on the...

The literature has not established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. When alpha is defined using the client's utility function, a positive alpha generally means the client would want to buy. When markets are incomplete investors...

Do more active hedge fund managing strategies generate higher returns than the less active ones? We develop a novel approach to measuring activeness for hedge funds by estimating the dynamics of risk exposure of a large sample of live and dead equity long-short funds. We find that higher...

We investigate the dynamic problem of how much attention an investor should pay to news in order to learn about stock-return predictability and maximize expected lifetime utility. We show that the optimal amount of attention is U-shaped in the return predictor, increasing with both uncertainty...

We provide strong evidence that the dispersion of individual stock options trading volume across moneynesses (IDISP) contains valuable information about future stock returns. Stocks with high IDISP consistently underperform those with low IDISP by more than 1% per month. In line with the idea...

We document a novel channel through which coordinated trading exerts externalities on financial markets. We study the impact of a financial advisory firm that recommends frequent reallocations between equity and bond funds to Chilean pension investors. The recommendations generate large and...

Exiting studies document that institutional herding has a stabilizing effect on stock prices, as stock returns over one- to three-quarter horizons are positively correlated with herding. The literature also shows that short-term institutions are better informed than long-term institutions....

Exchange traded funds (ETFs) are a multi-trillion dollar market that epitomizes financialization due to its recent growth. This study examines the behavior of U.S. listed currency hedged ETF investors towards changes in the underlying benchmark and foreign exchange rate from July 2011 to...

We estimate a heterogeneous agent model on five prominent equity investment styles - value, size, profitability, investment, and momentum - and find evidence for behavioral heterogeneity in expected return formation. Our model features two groups of boundedly rational investors, fundamentalists...

The research literature shows that investor sentiment is a contrarian predictor of aggregate stock market returns. However, we contend that investor sentiment only predicts aggregate stock market returns during high-sentiment states where overpricing is more prevalent than underpricing. Using a...