Henrik Cronqvist

Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience

In the 2000 U.S. Presidential campaign, George W. Bush advocated a partial privatization of the Social Security system. According to his plan, a portion of the payroll tax would be designated for individual savings accounts. At the same time as this issue was being debated in the United States, Sweden was in the process of launching a system that is very similar to President Bush’s proposal. Although Bush’s plan did not get much attention in the early years of his administration, the proposal may resurface either in the United States or in other countries. If so, important lessons can be learned from the Swedish experience. In particular, the Swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post-implementation experience. Although there is a large literature in economics on the design of social-security systems, most of that literature is concerned with macroeconomic considerations such as funding. In contrast, there has been much less attention devoted to the details of how plans might be designed, in part because these details do not seem important from a standard economic perspective. In this paper, we reverse this usual pattern and focus our attention on the design aspects of the Swedish plan. We find that, although most of the design choices are those that might be approved by most economists, in some cases these choices produced undesirable consequences.

Advertising and Portfolio Choice

This paper examines the role that advertising plays in the mutual fund industry and whether advertising affects investors’ fund and portfolio choices. Content analysis shows that only a small fraction of fund advertising is directly informative about characteristics relevant for rational investors, such as fund fees. Higher quantities of advertising do not signal ex ante higher unobservable fund manager ability, because funds that advertise more are not associated with higher post-advertising excess returns. Fund advertising is shown to affect investors’choices, although it provides little information. These results do not seem to be driven by the endogeneity of advertising, and are robust to a series of robustness checks. Finally, advertising is found to steer people towards portfolios with higher fees and more risk, through higher exposure to equities, more active management, more “hot” sectors, and more home bias. This evidence has implications for welfare analysis, asset pricing and public policy, and may serve as a starting point for broader analysis of marketing and persuasion efforts in financial markets

Estimating the Effects of Large Shareholders Using a Geographic Instrument

Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework that allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument (the density of wealthy individuals near a firms headquarters) for the presence of large, nonmanagerial individual shareholders in firms. These shareholders have a large impact on firms, controlling for selection effects.

Why Agency Costs Explain Diversification Discounts

We study diversification within the real estate industry because of its relative transparency: portfolio management of assets with well-defined market prices. Diversification is over property types and geographical regions. The major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue non-focusing strategies do indeed diversify more, are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy, are predominantly privately controlled and extensively using dual-class shares. The ex ante diversification discount is, therefore, a measure of agency costs.

The Genetics of Investment Biases

For a long list of investment “biases,” including lack of diversification, excessive trading, and the disposition effect, we find that genetic differences explain up to 45% of the remaining variation across individual investors, after controlling for observable individual characteristics. The evidence is consistent with a view that investment biases are manifestations of innate and evolutionary ancient features of human behavior. We find that work experience with finance reduces genetic predispositions to investment biases. Finally, we find that even genetically identical investors, who grew up in the same family environment, often differ substantially in their investment behaviors due to individual-specific experiences or events.Where do behavioral biases aecting investment decisions come from? We nd that a signicant proportion (about 20 to 56%) of investment biases such as home bias, loss aversion, performance chasing as well as trading intensity is attributable to genetic factors as opposed to the environment. We nd that higher socioeconomic status, measured by net worth, reduces the importance of a genetic predisposition, while education does not seem to moderate the inuence of genes. Consistent with the importance of underlying genetic factors, we nd that the correlation between familiarity expressed in nancial portfolios and in home location choices is essentially genetic. Our evidence contributes to a deeper understanding of investment biases, with potential implications for public policy.

Value versus Growth Investing: Why Do Different Investors Have Different Styles?

We find that several factors explain an individual investors style, i.e., the value versus growth orientation of the investors stock portfolio. First, we find that an investors style has a biological basis and is partially ingrained in an investor from birth. Second, we show that an investors hedging demands as well as behavioral biases explain investment style. Finally, an investors style is explained by life course theory in that experiences, both earlier and later in life, are related to investment style. Investors with adverse macroeconomic experiences (e.g., growing up during the Great Depression or entering the labor market during an economic recession) or who grow up in a lower socioeconomic status rearing environment have a stronger value orientation several decades later. Our research contributes a new perspective to the long-standing value and growth debate in finance.

Genetics, Homeownership, and Home Location Choice

We find that a significant proportion of the cross-sectional variation in the choice to own or rent is attributable to a genetic factor, while parental influence is not found to affect this choice. We also find evidence of gene-environment interactions: The environment moderates genetic effects on homeownership in that growing up in a wealthier family results in a stronger expression of genetic predispositions, while idiosyncratic life experiences appear to explain a larger portion of the variation in homeownership among those who grew up in a less wealthy family environment. Furthermore, we find that home location choices, for example, a familiar home location close to one’s birthplace and an urban versus a rural home location, are explained by both genetic factors and parental influence. Because we control for an extensive set of individual characteristics analyzed in existing research, an interpretation of our evidence is that an individual’s preferences with respect to homeownership and home location are partly genetic. The findings contribute to a deeper understanding of the factors that explain individual behavior with respect to the housing market, and add to an expanding literature on the biological and genetic factors that influence individuals’ economic and financial decisions.

Languages and Corporate Savings Behavior

Speakers of strong future time reference (FTR) languages (e.g., English) are required to grammatically distinguish between future and present events, while speakers of weak-FTR languages (e.g., Chinese) are not. We hypothesize that speaking about the future in the present tense may result in the belief that adverse credit events are more imminent. Consistent with such a linguistic hypothesis, weak-FTR language firms are found to have higher precautionary cash holdings. We report additional supportive results from changes in the relative importance of different languages in a countrys business domain, evidence from within one country with several distinct languages, and results related to changes following a severe financial crisis. Our evidence introduces a new explanation for heterogeneity in corporate savings behavior, provides insights about belief formation in firms, and adds to research on the effects of languages on economic outcomes.

Does Finance Make Us Less Social

Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. We find that financial contracting reduces participation in social networks. Specifically, increased crop insurance usage decreased local religious adherence and congregation membership in agricultural communities. Our identification utilizes the Federal Crop Insurance Reform Act of 1994 that doubled crop insurance usage nationally within a year, although changes in usage varied across counties. Difference-in-Difference and Spatial First Difference tests, with urban and neighboring counties as respective control groups, confirm that households substituted insurance for religiosity. This substitution was associated with reductions in crop diversification and crop yields, indicating an increase in moral hazard.