Robert P. Bartlett

Blind Consent? A Social Psychological Investigation of Non-Readership of Click-Through Agreements

Across two studies we aimed to measure empirically the extent of non-readership of click-through agreements (CTAs), identify the dominant beliefs about CTAs contributing to non-readership, and experimentally manipulate these beliefs to decrease automatic non-reading behavior and enhance contract efficiency. In our initial questionnaire study (Study 1), as predicted, the vast majority of participants reported not reading CTAs and the most prevalent beliefs about CTAs contributing to non-readership included: they are too long and time-consuming, they are all the same, they give one no choice but to agree, they are irrelevant, and vendors are generally reputable. Manipulating these beliefs on a simulated music website (Study 2) revealed an increase in readership. In addition, CTA comprehension and CTA rejection rates were both increased significantly by manipulating the length of the CTA. These results demonstrate support for the influence of widely held beliefs about CTAs on contract readership, provide evidence against the common “limited cognition” perspective on non-readership, and suggest that presenting CTAs in a short, readable format can increase CTA readership and comprehension as well as shopping of CTA terms.

Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis

Conventional wisdom concerning the causes of the Financial Crisis posits that insufficient disclosure concerning firms’ exposure to complex credit derivatives played a key role in creating the uncertainty that plagued the financial sector in the fall of 2008. To help avert future financial crises, regulatory proposals aimed at containing systemic risk have accordingly focused on enhanced derivative disclosures as a critical reform measure. A central challenge facing these proposals, however, has been understanding whether enhanced derivative disclosures can have any meaningful effect given the complexity of credit derivative transactions.This Article provides an empirical examination of the effect of enhanced derivative disclosures by examining the disclosure experience of the monoline insurance industry in 2008. Like AIG Financial Products, monoline insurance companies wrote billions of dollars of credit default swaps on multi-sector CDOs tied to residential home mortgages, but unlike AIG, their unique status as financial guarantee companies subjected them to considerable disclosure obligations concerning their individual credit derivative exposures. As a result, the experience of the monoline industry during the Financial Crisis provides an ideal setting with which to test the efficacy of reforms aimed at promoting more elaborate derivative disclosures.Overall, the results of this study indicate that investors in monoline insurers showed little evidence of using a firm’s derivative disclosures to efficiently resolve uncertainty about a monoline’s exposure to credit risk. In particular, analysis of the abnormal returns to Ambac Financial (one of the largest monoline insurers) surrounding a series of significant, multi-notch rating downgrades of its insured CDOs reveals no significant stock price reactions until Ambac itself announced the effect of these downgrades in its quarterly earnings announcements. Similar analyses of Ambac’s short-selling data and changes in the cost of insuring Ambac debt securities against default also confirm the absence of a market reaction following these downgrade announcements. Following a qualitative examination of how investors process derivative disclosures, the Article concludes that to the extent the complexity of CDOs impeded informational efficiency, it was most likely due to the generally low salience of individual CDOs as well as the logistic (although not necessarily analytic) challenge of processing a CDO’s disclosures. Reform efforts aimed at enhancing derivative disclosures should accordingly focus on mechanisms to promote the rapid collection and compilation of disclosed information as well as the psychological processes by which information obtains salience.

The Institutional Framework for Cost Benefit Analysis in Financial Regulation: A Tale of Four Paradigms?

AbstractThis paper analyzes the institutional framework that has historically governed the cost-benefit analysis (CBA) of financial regulation. Although U.S. financial regulators are often portrayed as being immune from CBA, the paper shows how each major regulator has historically used CBA under one of four distinct institutional paradigms. The existence of these distinct paradigms highlights that a formal CBA requirement need not lead to regulatory paralysis, but the uneven application of CBA they engender provides reason to believe that this institutional framework is far from ideal. To the extent that the goal of CBA is to provide meaningful, transparent analysis of rule making while avoiding regulatory paralysis, the paper argues in favor of moving toward a more uniform institutional framework for financial regulation. In particular, adopting a single CBA paradigm that requires interagency coordination but avoids judicial review provides the greatest promise for achieving this goal in financial regul...

Dark Trading at the Midpoint: Pricing Rules, Order Flow and High Frequency Liquidity Provision

We examine the competitive advantage enjoyed by dark venues over stock exchanges due to rules regulating the minimum price variation (MPV) for quoting equity securities. The MPV rule requires quotes above

Subsidizing Liquidity with Wider Ticks: Evidence from the Tick Size Pilot Study

1.00 per share to be in pennies, but it permits subpenny trades to facilitate price improvement for marketable orders. This exception to the penny quote rule benefits dark venues by allowing broker-dealers to intercept market orders by offering subpenny trading opportunities. However, a growing chorus of critics allege that (a) dark venues exploit this exception by offering little or no price improvement for market orders, and (b) allowing dark venues to intercept market orders harms the incentive to display liquidity on exchanges on which markets depend for efficient securities pricing. Using a novel regression discontinuity design and over eight trillion observations on market data from 2011-2014, we provide evidence that is inconsistent with both critiques. First, increasing the incentive to use the exception to the penny quote rule increases the rate of trading in dark venues at the midpoint of the national best bid and offer, thus offering liquidity takers price improvement in the form of the quoted half-spread. Second, while enhanced order flow to dark pools decreases price competition on exchanges, this reduction is primarily because of reduced quoting among high frequency trading (HFT) firms. Consistent with concerns about HFT, we show HFT market-making increases price volatility and that overall trading volume increases when it occurs in dark pools rather than on exchanges.

Consumer Lending Discrimination in the FinTech Era

Using data from the 2016-2018 tick size pilot study, we examine the efficacy of using wider tick sizes to subsidize market-making in small capitalization stocks. We demonstrate that realized spreads decay quickly within the initial microseconds of a trade. The effect reduces the subsidy offered by wider tick sizes, particularly for non-HFT market makers. The profit subsidy from wider tick sizes is also compromised by a significant shift in trading to “taker/maker” exchanges and to midpoint trading in non-exchange venues. The pilot’s exception for midpoint trades also accounts for the fact that nearly a third of trading remains in non-exchange venues despite the inclusion of a trade-at rule. Overall, these findings point to considerable inefficiencies in the pilot study’s goal of using wider tick sizes to subsidize liquidity provision in small capitalization stocks

Dark Trading at the Midpoint: Does SEC Enforcement Policy Encourage Stale Quote Arbitrage?

Discrimination in lending can occur either in face-to-face decisions or in algorithmic scoring. We provide a workable interpretation of the courts’ legitimate-business-necessity defense of statistical discrimination. We then estimate the extent of racial/ethnic discrimination in the largest consumer-lending market using an identification afforded by the pricing of mortgage credit risk by Fannie Mae and Freddie Mac. We find that lenders charge Latinx/African-American borrowers 7.9 and 3.6 basis points more for purchase and refinance mortgages respectively, costing them

A Founder's Guide to Unicorn Creation: How Liquidation Preferences in M&A Transactions Affect Start-Up Valuation

765M in aggregate per year in extra interest. FinTech algorithms also discriminate, but 40% less than face-to-face lenders. These results are consistent with both FinTech and non-FinTech lenders extracting monopoly rents in weaker competitive environments or profiling borrowers on low-shopping behavior. Such strategic pricing is not illegal per se, but under the law, it cannot result in discrimination. The lower levels of price discrimination by algorithms suggests that removing face-to-face interactions can reduce discrimination. Further silver linings emerge in the FinTech era: (1) Discrimination is declining; algorithmic lending may have increased competition or encouraged more shopping with the ease of platform applications. (2) We find that 0.74-1.3 million minority applications were rejected between 2009 and 2015 due to discrimination; however, FinTechs do not discriminate in loan approval.

Going Private But Staying Public: Reexamining the Effect of Sarbanes-Oxley on Firms' Going-Private Decisions

We examine the competitive advantage enjoyed by dark venues over stock exchanges due to rules regulating the minimum price variation (MPV) for quoting equity securities. The MPV rule requires quotes above

Venture Capital, Agency Costs, and the False Dichotomy of the Corporation

1.00 per share to be in pennies, but it permits subpenny trades to facilitate price improvement for marketable orders. This exception to the penny quote rule benefits dark venues by allowing broker-dealers to intercept market orders by offering subpenny trading opportunities. However, a growing chorus of critics allege that (a) dark venues exploit this exception by offering little or no price improvement for market orders, and (b) allowing dark venues to intercept market orders harms the incentive to display liquidity on exchanges on which markets depend for efficient securities pricing. Using a novel regression discontinuity design and over eight trillion observations on market data from 2011-2014, we provide evidence that is inconsistent with both critiques. First, increasing the incentive to use the exception to the penny quote rule increases the rate of trading in dark venues at the midpoint of the national best bid and offer, thus offering liquidity takers price improvement in the form of the quoted half-spread. Second, while enhanced order flow to dark pools decreases price competition on exchanges, this reduction is primarily because of reduced quoting among high frequency trading (HFT) firms. Consistent with concerns about HFT, we show HFT market-making increases price volatility and that overall trading volume increases when it occurs in dark pools rather than on exchanges.