The Portfolio-Driven Disposition Effect (with Li An, Joseph Engelberg, Baolian Wang, and Jared Williams)
Revising for 3rd round submission at the Journal of Finance
Abstract: Using retail trading and experimental data from the US and China, we show that the disposition effect is significantly stronger when an investor’s portfolio is at a loss, a phenomenon we label “the portfolio-driven disposition effect” (PDDE). We show that the PDDE affects seller-initiated trading volume and stock returns around and following earnings announcements, and that it is associated with a reduction in investors’ future trading performance. In our trading game experiments, the PDDE is significantly stronger among subjects whose survey responses are consistent with Thaler’s (1985) principles of mental framing, suggesting the PDDE is driven by hedonic mental accounting.
The Partisanship of Financial Regulators (with Joseph Engelberg, Asaf Manela, and Jared Williams)
Under 2nd round review at the Review of Financial Studies
Abstract: We analyze the partisanship of Securities and Exchange Commissioners (SEC) and members of the Federal Reserve Board of Governors (Fed). Using the language-based approach of Gentzkow, Shapiro, and Taddy (Econometrica, 2019), we identify partisan phrases in Congress, such as “red tape” and “climate change,” and observe their usage among regulators. Although the Fed has remained relatively non-partisan throughout our sample period (1930-2019), we find that partisanship among SEC Commissioners rose recently to an all-time high. This recent partisanship at the SEC appears in both the language of new SEC rules and the voting behavior of SEC Commissioners.
Abstract: Combining county-level natural disaster data with individual investor transactions, I document an increased disposition effect for investors impacted by a natural disaster. This effect is increasing in disaster severity and decreasing in time following the event, suggesting that extreme natural disasters can significantly influence investor behavior, especially in the short term. These findings are not explained by liquidity needs, tax incentives, or informed trading. The effect strengthens with local stocks and investors’ duration at their residence. Moreover, the increased disposition effect of disaster-affected investors is consistent with investors deriving utility from damages caused by environmental influences and realized gains/losses.
The Social Welfare of Marketplace Lending: Evidence from Natural Disasters (with Daniel Bradley and Sarath Valsalan)
Abstract: Using natural disasters as exogenous shocks to the peer-to-peer (P2P) loan market, we document a local increase in loan demand post-disaster. Interest rates and delinquencies from loans approved during this demand shock are similar to pre-event levels. Loans allocated prior to a disaster are more likely to suffer delinquency over the life of the loan, but loans granted a hardship accommodation delay of payment reduce the likelihood of future delinquency providing relief to borrowers and reduced delinquency costs to investors. Contrary to regulatory concerns that P2P lending is predatory, our results suggest they provide positive social welfare benefits.